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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 APRIL 30, 1998

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________

Commission file number 0-17085

TECHNICLONE CORPORATION
(Exact name of Registrant as specified in its charter)



Delaware 95-3698422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

14282 Franklin Avenue, Tustin, California 92780-7017
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (714) 508-6000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock
(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. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $86,514,186 as of July 23, 1998, based upon average
bid and asked prices of such stock.

[Cover page 1 of 2 pages]
Page 1 of 86 Pages


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APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.

62,989,216 shares of Common Stock
as of July 23, 1998


DOCUMENTS INCORPORATED BY REFERENCE.

Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 1998 Annual Meeting.



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TECHNICLONE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 30, 1998


TABLE OF CONTENTS





Forward-Looking Statements 4
Risk Factors 4


PART 1
Item 1. Business 17
Item 2. Properties 37
Item 3. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security Holders 37


PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters 38
Item 6. Selected Financial Data 39
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 41
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 48
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosures 48


PART III

Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management 49
Item 13. Certain Relationships and Related Party Transactions 49


PART IV

Item 14. Exhibits, Consolidated Financial Statements
Schedules, and Reports on Form 8-K 51




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FORWARD-LOOKING STATEMENTS

Except for historical information contained herein, this Annual Report
on Form 10-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. In light
of the important factors that can materially affect results, including those set
forth elsewhere in this Form 10-K, the inclusion of forward-looking information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company may
encounter competitive, technological, financial and business challenges making
it more difficult than expected to continue to develop, market and manufacture
its products; competitive conditions within the industry may change adversely;
upon development of the Company's products, demand for the Company's products
may weaken; the market may not accept the Company's products; the Company may be
unable to retain existing key management personnel; the Company's forecasts may
not accurately anticipate market demand; and there may be other material adverse
changes in the Company's operations or business. Certain important factors
affecting the forward-looking statements made herein include, but are not
limited to, the risks and uncertainties associated with completing pre-clinical
and clinical trials of the Company's technologies; obtaining additional
financing to support the Company's operations; obtaining regulatory approval for
such technologies; complying with other governmental regulations applicable to
the Company's business; obtaining the raw materials necessary in the development
of such compounds; consummating collaborative arrangements with corporate
partners for product development; achieving milestones under collaborative
arrangements with corporate partners; developing the capacity to manufacture,
market and sell the Company's products, either directly or indirectly with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; attracting and retaining key personnel; protecting proprietary rights;
accurately forecasting operating and capital expenditures, other commitments, or
clinical trial costs and other factors. Assumptions relating to budgeting,
marketing, product development and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause the Company to alter its capital expenditure or other budgets, which may
in turn affect the Company's business, financial position and results of
operations.

RISK FACTORS

FLUCTUATION OF FUTURE OPERATING RESULTS. Future operating results may
be impacted by a number of factors that could cause actual results to differ
materially from those stated herein. These factors include worldwide economic
and political conditions and industry specific factors. If the Company is to
remain competitive and is to timely develop and produce commercially viable
products at competitive prices in a timely manner, it must maintain access to
external financing sources until it can generate revenue from licensing
transactions or sales of products. The Company's ability to obtain financing and
to manage its expenses and cash depletion rate (burn rate) is the key to the
Company's continued development of product candidates and the completion of
ongoing clinical trials. The Company expects that its burn rate will vary
substantially on a quarter to quarter basis as it funds non-recurring items
associated with clinical trials, product development, antibody manufacturing and
radiolabeling expansion and scale-up, patent legal fees and various consulting
fees. The Company has limited experience with clinical trials and if the Company
encounters unexpected difficulties with its operations or clinical trials, it
may have to expend additional funds, which would increase its burn rate.


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EARLY STAGE OF DEVELOPMENT. Since its inception, the Company has been
engaged in the development of drugs and related therapies for the treatment of
people with cancer. The Company's product candidates are generally in the early
stages of development, with two product candidates currently in clinical trials.
Revenues from product sales have been insignificant and throughout the Company's
history there have been minimal revenues from product royalties. If the initial
results from any of the clinical trials are poor, then management believes that
such results will have a material adverse effect upon the Company's ability to
raise additional capital, which will affect the Company's ability to continue a
full-scale research and development effort for its antibody technologies.
Additionally, product candidates resulting from the Company's research and
development efforts, if any, are not expected to be available commercially for
at least the next year. No assurance can be given that the Company's product
development efforts, including clinical trials, will be successful, that
required regulatory approvals for the indications being studied can be obtained,
that its product candidates can be manufactured and radiolabeled at an
acceptable cost and with appropriate quality or that any approved products can
be successfully marketed.

NEED FOR ADDITIONAL CAPITAL. At April 30, 1998, the Company had
approximately $1,736,000 in cash and cash equivalents. The Company has
experienced negative cash flows from operations since its inception and expects
the negative cash flow from operations to continue for the foreseeable future.
The Company currently has significant liabilities related to the construction of
manufacturing facilities and has commitments to expend additional funds for
facilities construction, clinical trials, radiolabeling contracts, consulting,
for the repurchase of LYM-1 (Oncolym(R) hereafter) marketing rights from Alpha
Therapeutic Corporation (Alpha). The Company also anticipates the need for
significant funds for the repurchase of the European marketing rights for
Oncolym(R) from Biotechnology Development, Ltd. (BTD) and to scale-up the
manufacturing and radiolabeling capabilities. The Company expects operating
expenditures related to clinical trials to increase in the future as the
Company's clinical trial activity increases and scale-up for clinical trial
production continues. The repurchase of the European marketing rights from BTD
is subject to the Company obtaining additional cash resources or renegotiating
the agreement. As a result of increased activities in connection with the Phase
II/III clinical trials for Oncolym(R) and Phase I clinical trials for Tumor
Necrosis Therapy (TNT), and the development costs associated with Vasopermeation
Enhancements Agents (VEAs) and Vascular Targeting Agents (VTAs), the Company
expects that the monthly negative cash flow will continue.

During the period from May 1, 1998 through July 17, 1998, the Company
received $530,000 from the exercise of an option to purchase 530 shares of 5%
Adjustable Convertible Class C Preferred Stock (Class C Stock) from the
Placement Agent for the related stock offering and approximately $1,356,000 from
the exercise of warrants associated with the Class C Stock financing in exchange
for approximately 2,068,000 shares of the Company's common stock.

During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line (Equity Line) with two institutional investors. The
Equity Line expires in June 2001. Under the terms of the Equity Line, the
Company may, in its sole discretion, and subject to certain restrictions,
periodically sell ("Put") shares of the Company's common stock for up to
$20,000,000 upon the effective registration of the Put shares. After effective
registration for the Put shares, unless an increase is otherwise agreed to,
$2,250,000 of Puts can be made every quarter, subject to share issuance volume
limitations identical to those set forth in Rule 144(e).

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At the time of each Put, the investors will be issued a warrant,
expiring on December 31, 2004, to purchase up to 10% of the amount of common
stock issued to the investor at the same price at the time of the Put.

The Equity Line provides for immediate funding of $3,500,000 in
exchange for 2,545,454 shares of common stock. One-half of this amount is
subject to adjustment at three months after the effective date of the
registration statement registering these shares with the second half subject to
adjustment six months after such effective date of the registration of these
shares. At each adjustment date, if the market price at the three or six month
period ("Adjustment Price") is less than the initial price paid for the common
stock, the Company will be required to issue additional shares of its common
stock equal to the difference between the amount of shares which would have been
issued if the price had been the Adjustment Price for $1,750,000. The Company
will also be required to issue additional warrants at each three month and six
month period for 10% of any additional shares issued. Future Puts under the
Equity Line will be priced at a 15% discount on the 10 day low closing bid
price.

The Company must raise additional funds to sustain its research and
development efforts, provide for future clinical trials, expand its
manufacturing and radiolabeling capabilities, and continue its operations until
it is able to generate sufficient additional revenue from the sale and/or
licensing of its products. The Company will be required to obtain financing
through one or more methods including a sale and subsequent leaseback of its
facilities, obtaining additional equity or debt financing and/or negotiating a
licensing or collaboration agreement with another company. The Company must also
renegotiate the terms under the buyback agreement for the Oncolym(R) European
marketing rights, or obtain additional financing prior to August 29, 1998,
should the Company exercise its purchase option for the Oncolym(R) European
marketing rights. There can be no assurance that the Company will be successful
in raising such funds on terms acceptable to it, or at all, or that sufficient
additional capital will be raised to complete the research, development, and
clinical testing of the Company's product candidates. The Company's future
success is dependent upon raising additional money to provide for the necessary
operations of the Company. If the Company is unable to obtain additional
financing, there would be a material adverse effect on the Company's business,
financial position and results of operations.

On July 17, 1998, the Company notified the holders of the Class C Stock
of its intention to redeem the Stock Purchase Warrants (Warrants) issued in
conjunction with the 5% Adjustable Class C Preferred Stock (Class C Stock)
financing. The redemption notice provides that all of the outstanding Warrants
will be redeemed, if not converted on or before August 6, 1998. Under the terms
of the financing, upon conversion of the Class C Stock, the holders of the Class
C Stock were granted Warrants to purchase one-fourth of the common stock issued
upon conversion for $.6554 per share. The agreement provides that the Company
may redeem the Warrants for $.01 per share provided that certain conditions are
met. Upon delivery of a notice of redemption to the warrantholder by the
Company, the warrantholder may exercise the Warrants for cash, on a cashless
basis or any combination thereof. Assuming a closing bid price of the Company's
common stock of $1.50 per share, if the warrantholders elect to exercise on a
cashless basis, the Company will issue approximately 2,295,000 shares of its
common stock. If all of the warrantholders elect to exercise on a cash basis,
the Company will receive approximately $2,672,000 and will issue approximately
4,076,000 shares of its common stock. Should the closing bid price of the
Company's common stock be less than $.98 during the period from July 17, 1998
through August 6, 1998, the Company's redemption of the warrants will be
nullified. If the warrant redemption is nullified, the Company will


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not receive any proceeds from the warrant redemption and any unexercised
warrants could remain outstanding at the election of the warrantholder.

In July 1998, the Company renegotiated its short-term note payable for
$2,385,000 with a construction contractor to provide for an immediate payment by
the Company of $500,000 and an extension of time until August 17, 1998 to pay
the remaining balance of approximately $1,885,000. Interest on the remaining
balance is payable under the same terms as the original note. In connection with
the extension agreement, the Company issued an additional warrant, expiring in
July 2001, to purchase up to 95,000 shares of the Company's common stock at
$1.37 per share.

During the same period, the Company entered into an agreement for the
sale and subsequent leaseback of its facilities, which consists of two buildings
located in Tustin, California. The sale/leaseback transaction is with an
unrelated entity and provides for the leaseback of the Company's facilities for
a ten-year period with two five-year options to renew. Proceeds from the sale of
the Company's facilities are expected to be sufficient to retire the mortgage
notes payable on the facilities as well as the amounts owed to the contractor
for the upgrade and expansion of its antibody production facilities. While the
sale/leaseback agreement is in escrow, it is subject to completion of normal due
diligence procedures by the buyer and there is no assurance that the transaction
will be completed on a timely basis or at all. Should the transaction not be
completed by August 17, 1998, the Company will be required to utilize current
cash funds to retire the $1,885,000 remaining balance owed to the contractor and
will be required to find another buyer for the building or obtain alternative
sources of financing.

Without obtaining additional financing or completing one or more of
the aforementioned transactions, the Company believes that it has sufficient
cash on hand and available pursuant to the equity-based line of credit mentioned
above to meet its obligations on a timely basis through January 31, 1999.

ANTICIPATED FUTURE LOSSES. The Company has experienced significant
losses since inception. As of April 30, 1998, the Company's accumulated deficit
was approximately $72,639,000. The Company expects to incur significant
additional operating losses in the future and expects cumulative losses to
increase substantially due to expanded research and development efforts,
preclinical studies and clinical trials, and scale-up of manufacturing and
radiolabeling capabilities. The Company expects that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial. All of the
Company's products are in development, preclinical studies or clinical trials,
and significant revenues have not been generated from product sales. To achieve
and sustain profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, manufacture, introduce,
market and sell its products. The time frame necessary to achieve market success
is long and uncertain. The Company does not expect to generate significant
product revenues for at least two years. There can be no assurance that the
Company will ever generate significant product revenues, which are sufficient to
become profitable or to sustain profitability.

COMMERCIAL PRODUCTION. To conduct clinical trials on a timely basis,
obtain regulatory approval and be commercially successful, the Company must be
able to scale-up its manufacturing and radiolabeling processes and ensure
compliance with regulatory requirements of its product candidates so that such
product candidates can be manufactured and radiolabeled in increased quantities.
As the Company's products currently in clinical trials, Oncolym(R) and Tumor
Necrosis Therapy (TNT), move towards Food and Drug Administration (FDA)
approval, the Company or

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contract manufacturers must scale-up the production processes to enable
production and radiolabeling in commercial quantities. The Company has expended
significant funds for the scale-up of its antibody manufacturing capabilities
for clinical trial requirements for its Oncolym(R) and TNT products and for
refinement of its radiolabeling processes. If the Company were to commercially
self-manufacture either of these products, it will have to expend an estimated
additional six to ten million dollars for production facility expansion and an
estimated additional five to eight million dollars for radiolabeling facilities.
However, the Company believes it can successfully negotiate an agreement with
contract antibody manufacturers to have these products produced on a "per run
basis", thereby deferring or reducing the significant expenditure (six to ten
million dollars) estimated to scale-up manufacturing. The Company believes that
it can successfully negotiate an agreement with contract radiolabeling companies
to provide radiolabeling services to meet commercial demands. Such a contract
would, however, require a substantial investment by the Company (estimated at
five to eight million dollars over the next two years) for equipment and related
production area enhancements required by these vendors, and also for vendor
services associated with technology transfer assistance, scale-up and production
start-up, and for regulatory assistance. The Company anticipates that production
of its products in commercial quantities will create technical and financial
challenges for the Company. The Company has limited manufacturing experience,
and no assurance can be given as to the Company's ability to scale-up its
manufacturing operations, the suitability of the Company's present facility for
clinical trial production or commercial production, the Company's ability to
make a successful transition to commercial production and radiolabeling or the
Company's ability to reach an acceptable agreement with contract manufacturers
to produce and radiolabel Oncolym(R), TNT, or the Company's other product
candidates in clinical or commercial quantities. The failure of the Company to
scale-up its manufacturing and radiolabeling for clinical trial or commercial
production or to obtain contract manufacturers, could have a material adverse
effect on the Company's business, financial position and results of operations.

SHARES ELIGIBLE FOR FUTURE SALE; DILUTION. The decline in the market
price of the Company's common stock has lead to substantial dilution to holders
of common stock. The Class C Stock provides for shares of the Class C Stock to
be converted into shares of the Company's common stock at the lower of a
conversion cap of $.5958 (the Conversion Cap) or a conversion price indexed to
the market price of the common stock at the time of conversion. Sales,
particularly short selling, of substantial amounts of common stock in the public
market have and may adversely affect the prevailing market price of the common
stock and, depending upon the then current market price of the common stock,
increase the risks associated with the possible conversion of the Class C Stock
and related warrants. From September 26, 1997, the date on which the Class C
Stock was first convertible, through March 1998, the price of the Company's
common stock steadily declined while the average trading volume increased
significantly.

From September 26, 1997 (the date the Class C Stock became convertible
into common stock) through July 17, 1998, 13,619 shares of Class C Stock,
including Class C dividend shares, were converted into 24,578,437 shares of
common stock, resulting in substantial dilution to the common shareholders. In
addition, in conjunction with the conversion of the Class C Stock, the holders
were granted warrants to purchase shares of common stock of the Company.
Warrants to purchase 2,068,380 shares of common stock have been exercised
through July 17, 1998. At July 17, 1998, Warrants to purchase 4,076,157 shares
of common stock remained outstanding and exercisable at $.6554 per share. The
remaining 354 shares of Class C Stock outstanding at July 17, 1998, may be
converted into shares of common stock at the lower of a 27% discount from the
average of the lowest market trading price for the five days preceding
conversion (Conversion Price) or the Conversion

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Cap. Additional warrants will be issued upon the conversion of the remaining
shares of Class C Stock in accordance with the terms of the agreement.

In addition to the warrants set forth above, at July 17, 1998, the
Company had outstanding warrants and options to employees, directors,
consultants and other parties to issue approximately 8,622,000 shares of common
stock at an average price of $1.08 per share. The warrants and options expire at
various dates through June 2008.

STOCK PRICE FLUCTUATIONS AND LIMITED TRADING VOLUME. The Company's
participation in the highly competitive biotechnology industry often results in
significant volatility in the market price of the Company's common stock. Also,
at times there is a limited trading volume in the Company's common stock.
Announcements of technological innovations or new commercial products by the
Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and foreign countries, public
concern as to the safety of biotechnology products and economic and other
external factors, as well as period-to-period fluctuations in financial results
may have a significant impact on the market price of the Company's common stock.
The volatility in the stock price and the potential additional new shares of
common stock that may be issued on the exercise of warrants and options and the
historical limited trading volume are significant risks investors should
consider. As a result of the Warrants outstanding related to the Class C Stock
conversions, the Company will be required to issue a substantial amount of
additional shares of common stock should the warrantholders exercise their
Warrants.

If the holders of the warrants exercise all or a significant portion of
their Warrants in a limited time period and attempt to sell all or a significant
portion of the shares of common stock issued in the open market, a depression of
the market price for a share of the Company's common stock could result.

MAINTENANCE CRITERIA FOR NASDAQ, RISKS OF LOW-PRICED SECURITIES. The
Company's common stock is presently traded on the Nasdaq SmallCap Market. To
maintain inclusion on the Nasdaq SmallCap Market, the Company's common stock
must continue to be registered under Section 12(g) of the Exchange Act, and the
Company must continue to have either net tangible assets of at least $2,000,000,
market capitalization of at least $35,000,000, or net income (in either its
latest fiscal year or in two of its last three fiscal years) of at least
$500,000. In addition, the Company must meet other requirements, including, but
not limited to, having a public float of at least 500,000 shares and $1,000,000,
a minimum bid price of $1.00 per share of common stock, at least two market
makers and at least 300 stockholders, each holding at least 100 shares of common
stock. For the period of January 29, 1998 through May 4, 1998, the Company
failed to maintain the $1.00 bid requirement, but since May 5, 1998, the Company
has met the minimum $1.00 bid price requirement. The Company is currently in
compliance with such requirements; however, there is no assurance that the
Company will be able to maintain these requirements in the future. If the
Company fails to meet the Nasdaq SmallCap Market listing requirements, the
market value of the common stock would decline and holders of the Company's
common stock would likely find it more difficult to dispose of, and to obtain
accurate quotations as to the market value of the common stock.

If the Company's common stock ceases to be included on the Nasdaq
SmallCap Market, the Company's common stock could become subject to rules
adopted by the Commission regulating broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national

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securities exchanges or quoted on Nasdaq, provided that current price and volume
information with respect to transactions in such securities is provided). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the Commission which provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its sales person in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from these
rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to these penny stock rules. If the
Company's common stock becomes subject to the penny stock rules, investors may
be unable to readily sell their shares of common stock.

INTENSE COMPETITION. The biotechnology industry is intensely
competitive and changing rapidly. Substantially all of the Company's existing
competitors have greater financial resources, larger technical staffs, and
larger research budgets than the Company and greater experience in developing
products and running clinical trials. Two of the Company's competitors, Idec
Pharmaceuticals Corporation ("Idec") and Coulter Pharmaceuticals, Inc.
("Coulter"), each has a lymphoma antibody that may compete with the Company's
Oncolym(R) product. Idec is currently marketing its lymphoma product for low
grade non-Hodgkins Lymphoma and the Company believes that Coulter will be
marketing its respective lymphoma product prior to the time the Oncolym(R)
product will be submitted to the FDA for marketing approval. Coulter has also
announced that it intends to seek to conduct clinical trials of its antibody
treatment for intermediate and/or high grade non-Hodgkins lymphomas. In
addition, there are several companies in preclinical studies with angiogenesis
technologies which may compete with the Company's Vascular Targeting Agent (VTA)
technology. There can be no assurance that the Company will be able to compete
successfully or that competition will not have a material adverse effect on the
Company's business, financial position and results of operations. There can be
no assurance that the Company's competitors will not be able to raise
substantial funds and to employ these funds and their other resources to develop
products which compete with the Company's other product candidates.

TECHNOLOGICAL UNCERTAINTY. The Company's future success will depend
significantly upon its ability to develop and test workable products for which
the Company will seek FDA approval to market to certain defined groups. A
significant risk remains as to the technological performance and commercial
success of the Company's technology and products. The products currently under
development by the Company will require significant additional laboratory and
clinical testing and investment over the foreseeable future. The research,
development, and testing activities, together with the resulting increases in
associated expenses, are expected to result in operating losses for the
foreseeable future. Although the Company is optimistic that it will be able to
successfully complete development of one or more of its products, there can be
no assurance that (i) the Company's research and development activities will be
successful; (ii) any proposed products will prove to be effective in clinical
trials; (iii) the Company's product candidates will not cause harmful side
effects during clinical trials; (iv) the Company's product candidates may take
longer to progress through

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clinical trials than has been anticipated; (v) the Company's product candidates
may prove impracticable to manufacture in commercial quantities at a reasonable
cost and/or with acceptable quality; (vi) the Company will be able to obtain all
necessary governmental clearances and approvals to market its products; (vii)
the Company's product candidates will prove to be commercially viable or
successfully marketed; or (viii) that the Company will ever achieve significant
revenues or profitable operations. In addition, the Company may encounter
unanticipated problems, including development, manufacturing, distribution,
financing and marketing difficulties. The failure to adequately address such
difficulties could have a material adverse effect on the Company's business,
financial position and results of operations.

The results of initial preclinical and clinical testing of the products
under development by the Company are not necessarily indicative of results that
will be obtained from subsequent or more extensive preclinical studies and
clinical testing. The Company's clinical data gathered to date with respect to
its Oncolym(R) antibody are primarily from a Phase II dose escalation trial
which was designed to develop and refine the therapeutic protocol to determine
the maximum tolerated dose of total body radiation and to assess the safety and
efficacy profile of treatment with a radiolabeled antibody. Further, the data
from this Phase II dose escalation trial were compiled from testing conducted at
a single site and with a relatively small number of patients. Substantial
additional development and clinical testing and investment will be required
prior to seeking any regulatory approval for commercialization of this potential
product. There can be no assurance that clinical trials of Oncolym(R) or TNT, or
other product candidates under development will demonstrate the safety and
efficacy of such products to the extent necessary to obtain regulatory approvals
for the indications being studied, or at all. Companies in the pharmaceutical
and biotechnology industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. The
failure to adequately demonstrate the safety and efficacy of Oncolym(R), TNT, or
any other therapeutic product under development could delay or prevent
regulatory approval of the product and would have a material adverse effect on
the Company's business, financial condition and results of operations.

UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS. The Company has limited
experience in conducting clinical trials. The rate of completion of the
Company's clinical trials will be dependent upon, among other factors, the rate
of patient enrollment. Patient enrollment is a function of many factors,
including the nature of the Company's clinical trial protocols, existence of
competing protocols, size of the patient population, proximity of patients to
clinical sites and eligibility criteria for the study. Delays in patient
enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company. There is no assurance that patients
enrolled in the Company's clinical trials will respond to the Company's product
candidates. Setbacks are to be expected in conducting human clinical trials.
Failure to comply with the FDA regulations applicable to such testing can result
in delay, suspension or cancellation of such testing, and/or refusal by the FDA
to accept the results of such testing. In addition, the FDA may suspend clinical
trials at any time if it concludes that the subjects or patients participating
in such trials are being exposed to unacceptable health risks. Further, there
can be no assurance that human clinical testing will show any current or future
product candidate to be safe and effective or that data derived therefrom will
be suitable for submission to the FDA. Any suspension or delay of any of the
clinical trials could have a material adverse effect on the Company's business,
financial condition and results of operations.


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LENGTHY REGULATORY PROCESS; NO ASSURANCE OF REGULATORY APPROVALS.
Testing, manufacturing, radiolabeling, advertising, promotion, export and
marketing, among other things, of the Company's proposed products are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are regulated by the
FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in
the case of biologics, the Public Health Service Act. At the present time, the
Company believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulation.

The steps required before a biologic may be approved for marketing in
the United States generally include (i) preclinical laboratory tests and animal
tests, (ii) the submission to the FDA of an Investigational New Drug application
("IND") for human clinical testing, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product, (iv) the submission
to the FDA of a Product License Application ("PLA") or a Biologics License
Application ("BLA"), (v) the submission to the FDA of an Establishment License
Application ("ELA"), (vi) FDA review of the ELA and the PLA or BLA, and (vii)
satisfactory completion of an FDA inspection of the manufacturing facility or
facilities at which the product is made to assess compliance with Current Good
Manufacturing Practices (CGMP). The testing and approval process requires
substantial time, effort, and financial resources and there can be no assurance
that any approval will be granted on a timely basis, if at all. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specific time period, if at all, with respect to any of
the Company's product candidates. Furthermore, the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.

The results of preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of a product candidate,
are submitted to the FDA as a PLA or BLA requesting approval to market the
product candidate. Before approving a PLA or BLA, the FDA will inspect the
facilities at which the product is manufactured, and will not approve the
marketing of the product candidate unless CGMP compliance is satisfactory. The
FDA may deny a PLA or BLA if applicable regulatory criteria are not satisfied,
require additional testing or information, and/or require postmarketing testing
and surveillance to monitor the safety or efficacy of a product. There can be no
assurance that FDA approval of any PLA or BLA submitted by the Company will be
granted on a timely basis or at all. Also, if regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
it may be marketed.

Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, or the PLA
or BLA review process may result in various adverse consequences, including the
FDA's delay in approving or refusing to approve a product, withdrawal of an
approved product from the market, and/or the imposition of criminal penalties
against the manufacturer and/or license holder. For example, license holders are
required to report certain adverse reactions to the FDA, and to comply with
certain requirements concerning advertising and promotional labeling for their
products. Also, quality control and manufacturing procedures must continue to
conform to CGMP regulations after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with CGMP. Accordingly,
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to maintain CGMP compliance. In addition,
discovery of problems may result in restrictions on a

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product, manufacturer, including withdrawal of the product from the market.
Also, new government requirements may be established that could delay or prevent
regulatory approval of the Company's product candidates.

The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product candidate by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, the Company intends, to the extent possible,
to rely on licensees to obtain regulatory approval for marketing its products in
foreign countries.

SOURCE OF RADIOLABELING SERVICES. The Company currently procures its
radiolabeling services pursuant to negotiated contracts with one domestic entity
and one European entity. There can be no assurance that these suppliers will be
able to qualify their facilities, label and supply antibody in a timely manner,
if at all, or that governmental clearances will be provided in a timely manner,
if at all, and that clinical trials will not be delayed or disrupted. Prior to
commercial distribution, the Company will be required to identify and contract
with a commercial radiolabeling company for commercial services. The Company is
presently in discussions with several companies to provide commercial
radiolabeling services. A commercial radiolabeling service agreement will
require the investment of substantial funds by the Company (see Manufacturing
and Production). The Company expects to rely on its current suppliers for all or
a significant portion of its requirements for the Oncolym(R) and TNT antibody
products to be used in clinical trials for the immediate future. Radiolabeled
antibody cannot be stockpiled against future shortages due to the eight-day
half-life of the I131 radioisotope. Accordingly, any change in the Company's
existing or future contractual relationships with, or an interruption in supply
from, its third-party suppliers could adversely affect the Company's ability to
complete its ongoing clinical trials and to market the Oncolym(R) and TNT
antibodies, if approved. Any such change or interruption would have a material
adverse effect on the Company's business, financial condition and results of
operations.

HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of the
Company's Oncolym(R) and TNT require the handling and disposal the radioactive
isotope I131. The Company is relying on its current contract manufacturers to
radiolabel its antibodies with I131 and to comply with various local, state and
or national regulations regarding the handling and use of radioactive materials.
Violation of these local, state, national, or international regulations by these
radiolabeling companies or a clinical trial site could significantly delay
completion of such trials. Violations of safety regulations could occur with
these manufacturers, and, therefore, there is a risk of accidental contamination
or injury. The Company could be held liable for any damages that result from
such an accident, contamination or injury from the handling and disposal of
these materials, as well as for unexpected remedial costs and penalties that may
result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations. In the event of any such noncompliance or
accident, the supply of Oncolym(R) and TNT for use in clinical trials or
commercially could be interrupted, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

DEPENDENCE ON THIRD PARTIES FOR COMMERCIALIZATION. The Company intends
to sell its products in the United States and internationally in collaboration
with marketing partners. At the present time, the Company does not have a sales
force to market Oncolym(R) or TNT. If and when

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the FDA approves Oncolym(R) or TNT, the marketing of Oncolym(R) and TNT will be
contingent upon the Company either licensing or entering into a marketing
agreement with a large company or upon it recruiting, developing, training and
deploying its own sales force. The Company does not presently possess the
resources or experience necessary to market either Oncolym(R), TNT, or its other
product candidates. Other than the agreement with BTD, the Company presently has
no agreements for the licensing or marketing of its product candidates, and
there can be no assurance that the Company will be able to enter into any such
agreements in a timely manner or on commercially favorable terms, if at all.
Development of an effective sales force requires significant financial
resources, time, and expertise. There can be no assurance that the Company will
be able obtain the financing necessary or to establish such a sales force in a
timely or cost effective manner, if at all, or that such a sales force will be
capable of generating demand for the Company's product candidates.

UNCERTAINTY OF MARKET ACCEPTANCE. Even if the Company's products are
approved for marketing by the FDA and other regulatory authorities, there can be
no assurance that the Company's products will be commercially successful. If the
Company's two products in clinical trials, Oncolym(R) and TNT, are approved,
they would represent a departure from more commonly used methods for cancer
treatment. Accordingly, Oncolym(R) and TNT may experience under-utilization by
oncologists and hematologists who are unfamiliar with the application of
Oncolym(R) and TNT in the treatment of cancer. As with any new drug, doctors may
be inclined to continue to treat patients with conventional therapies, in most
cases chemotherapy, rather than new alternative therapies. The Company or its
marketing partner will be required to implement an aggressive education and
promotion plan with doctors in order to gain market recognition, understanding,
and acceptance of the Company's products. Market acceptance also could be
affected by the availability of third party reimbursement. Failure of Oncolym(R)
and TNT to achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.

PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend, in
large part, on its ability to maintain a proprietary position in its products
through patents, trade secrets and orphan drug designations. The Company has
several United States patents, United States patent applications and numerous
corresponding foreign patent applications, and has licenses to patents or patent
applications owned by other entities. No assurance can be given, however, that
the patent applications of the Company or the Company's licensors will be issued
or that any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. The patent position worldwide of biotechnology companies in
relation to proprietary products is highly uncertain and involves complex legal
and factual questions. Moreover, there can be no assurance that any patents
issued to the Company or the Company's licensors will not be infringed by others
or will be enforceable against others. In addition, there can be no assurance
that the patents, if issued, would be held valid or enforceable by a court of
competent jurisdiction. Enforcement of the Company's patents may require
substantial financial and human resources. The Company may have to participate
in interference proceedings if declared by the United States Patent and
Trademark Office to determine priority of inventions, which typically take
several years to resolve and could result in substantial costs to the Company.

A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody and angiogenesis fields, competitors may have filed applications for or
have been issued patents and may obtain additional patents and proprietary
rights relating to products or processes competitive with or similar to those of
the Company. To date, no consistent policy has emerged regarding the breadth of
claims allowed in biopharmaceutical patents. There can be no assurance that
patents do not exist in the United States

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or in foreign countries or that patents will not be issued that would have an
adverse effect on the Company's ability to market any product which it develops.
Accordingly, the Company expects that commercializing monoclonal antibody-based
products may require licensing and/or cross-licensing of patents with other
companies in this field. There can be no assurance that the licenses, which
might be required for the Company's processes or products, would be available,
if at all, on commercially acceptable terms. The ability to license any such
patents and the likelihood of successfully contesting the scope or validity of
such patents is uncertain and the costs associated therewith may be significant.
If the Company is required to acquire rights to valid and enforceable patents
but cannot do so at a reasonable cost, the Company's ability to manufacture its
products would be materially adversely affected.

The Company also relies on trade secrets and proprietary know-how,
which it seeks to protect, in part, by confidentiality agreements with its
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.

PRODUCT LIABILITY. The manufacture and sale of human therapeutic
products involve an inherent risk of product liability claims. The Company has
only limited product liability insurance. There can be no assurance that the
Company will be able to maintain existing insurance or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, if at all. An inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims brought against the Company in excess
of its insurance coverage, if any, or a product recall could have a material
adverse effect upon the Company's business, financial condition and results of
operations.

HEALTH CARE REFORM AND THIRD-PARTY REIMBURSEMENT. Political, economic
and regulatory influences are subjecting the health care industry in the United
States to fundamental change. Recent initiatives to reduce the federal deficit
and to reform health care delivery are increasing 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 affect
the Company's ultimate profitability. Legislative debate is expected to continue
in the future, and market forces are expected to drive reductions of health care
costs. The Company 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.

The Company's ability to successfully commercialize its product
candidates will depend in part on the extent to which appropriate reimbursement
codes and authorized cost reimbursement levels of such products and related
treatment are obtained from governmental authorities, private health insurers
and other organizations, such as health maintenance organizations ("HMOs"). The
Health Care Financing Administration ("HCFA"), the agency responsible for
administering the Medicare program, sets requirements for coverage and
reimbursement under the program, pursuant to the Medicare law. In addition, each
state Medicaid program has individual requirements that affect coverage and
reimbursement decisions under state Medicaid programs for certain health care


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providers and recipients. Private insurance companies and state Medicaid
programs are influenced, however, by the HCFA requirements.

There can be no assurance that any of the Company's product candidates,
once available, will be included within the then current Medicare coverage
determination. In the absence of national Medicare coverage determination, local
contractors that administer the Medicare program, within certain guidelines, can
make their own coverage decisions. Favorable coverage determinations are made in
those situations where a procedure falls within allowable Medicare benefits and
a review concludes that the service is safe, effective and not experimental.
Under HCFA coverage requirements, FDA approval for marketing will not
necessarily lead to a favorable coverage decision. A determination will still
need to be made as to whether the product is reasonable and necessary for the
purpose used. In addition, HCFA has proposed adopting regulations that would add
cost-effectiveness as a criterion in determining Medicare coverage. Changes in
HCFA's coverage policy, including adoption of a cost-effective criterion could
have a material adverse effect on the Company.

Third-party payers are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs may all result in lower prices for the Company's
product candidates than it expects. The cost containment measures that health
care payers and providers are instituting and the effect of any health care
reform could materially adversely affect the Company's ability to operate
profitably.

DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is
dependent upon a limited number of key management and technical personnel. The
loss of the services of one or more of such key employees could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's success will be dependent upon its
ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition in its recruiting
activities, and there can be no assurance that the Company will be able to
attract and/or retain qualified personnel.

IMPACT OF THE YEAR 2000. The Company is continually modifying and
upgrading its software and systems and has modified its current financial
software to be Year 2000 compliant. The Company does not believe that with
upgrades of existing software and/or conversion to new software that the Year
2000 issue will pose significant operational problems for its internal computer
systems. The Company expects all systems to be Year 2000 compliant by April 30,
1999 through the use of internal and external resources. However, there can be
no assurance that the systems of other companies on which the Company may rely
also will be timely converted or that such failure to convert by another company
would not have an adverse effect on the Company's systems. The Company presently
believes the Year 2000 problem will not pose significant operational problems
and is not anticipated to have a material effect on its financial position or
results of operations in any given year. Actual results could differ materially
from the Company's expectations due to unanticipated technological difficulties
or project delays by the Company or its suppliers.

EARTHQUAKE RISKS. The Company's corporate and research facilities,
where the majority of its research and development activities are conducted, are
located near major earthquake faults which have experienced earthquakes in the
past. The Company does not carry earthquake insurance on its facility due to its
prohibitive cost and limited available coverage. In the event of a major
earthquake


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or other disaster affecting the Company's facilities, the operations and
operating results of the Company could be adversely affected.




PART I

ITEM 1. BUSINESS

GENERAL

Techniclone Corporation was incorporated in the State of Delaware on
September 25, 1996. On March 24, 1997, Techniclone International Corporation, a
California corporation, (predecessor company incorporated in June 1981) was
merged with and into Techniclone Corporation, a Delaware corporation
(collectively "Techniclone"). This merger was effected for the purpose of
effecting a change in the Company's state of incorporation from California to
Delaware and making certain changes in the Company's charter documents. The
"Company" refers to Techniclone Corporation, Techniclone International
Corporation, its former subsidiary, Cancer Biologics Incorporated ("CBI"), which
was merged into the Company on July 26, 1994 and its wholly-owned subsidiary
Peregrine Pharmaceuticals, Inc., a Delaware corporation ("Peregrine").

On April 24, 1997, the Company acquired all of the outstanding stock of
Peregrine in exchange for 5,080,000 shares of the Company's common stock and the
assumption of net liabilities of approximately $484,000. Peregrine is a
development stage company involved in the research and development of Vascular
Targeting Agents (VTAs). The acquisition was accounted for as a purchase. The
excess of the purchase price over net tangible assets acquired (cash and notes
receivable) and liabilities assumed (accounts payable and accrued liabilities)
represents the difference between the fair value of the Company's common stock
exchanged and the fair value of net assets purchased. The excess purchase price
of approximately $27,154,000 over the net tangible assets acquired represents
the amount paid for acquired technologies and related intangible assets. The
excess purchase price for the acquisition was charged to operations as of the
effective date of the acquisition as the related technologies had not reached
technological feasibility and the technology had no known future alternative
uses other than the possibility for treating cancer patients.

The Company's offices and laboratories are located at 14282 Franklin
Avenue, Tustin, California 92780-7017, and its telephone number is (714)
508-6000.

PRODUCT PLATFORM

Techniclone Corporation is engaged in the research, development and
commercialization of novel cancer therapeutics in two principal areas: 1) direct
tumor targeting agents for the treatment of refractory malignant lymphoma and 2)
collateral targeting agents for the treatment of solid tumors.

Oncolym(R), the Company's most advanced direct tumor targeting agent
candidate, is an investigational murine monoclonal antibody radiolabeled with
I131 which is being studied in a Phase II/III trial for the treatment of
intermediate and high-grade relapsed or refractory B-cell non-Hodgkins lymphoma
(NHL). The clinical trials are currently being held at participating medical
centers, including, M.D. Anderson Cancer Center, George Washington University
Medical Center, Iowa City VA Medical Center, Queen's Medical Center-Hawaii,
University of Illinois at Chicago

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Medical Center and University of Miami Hospital. The Company currently
anticipates adding up to four additional clinical trial sites for Oncolym(R).
Following the completion of the clinical trials, the Company expects to file an
application with the FDA to market Oncolym(R) in the United States.

Collateral tumor targeting is broadly described as the therapeutic
strategy of targeting peripheral structures and cell types, other than the
viable cancer cells directly, as a means to treat solid tumors. The Company
three leading advanced collateral targeting agents for solid tumors are Tumor
Necrosis Therapy (TNT), Vascular Targeting Agents (VTAs), and Vasopermeation
Enhancement Agents (VEAs).

Tumor Necrosis Therapy (TNT) is a universal tumor targeting therapy
potentially capable of treating a wide range of solid tumors. Radiolabeled TNT
agents act by binding to dead or dying cells at the core of the tumor and
irradiating the tumor from the inside out. TNT is potentially capable of
carrying a wide variety of therapeutic agents to the interior of solid tumors.
The Company's first TNT based product is an investigational, chimeric monoclonal
antibody radiolabeled with the I131 isotope. During March 1998, the Company
began enrolling patients into a Phase I study of TNT for the treatment of
malignant glioma (brain cancer). The clinical trials are currently being
conducted at The Medical University of South Carolina with additional clinical
sites to be added in the future.

Vascular Targeting Agents (VTAs) act by destroying the vasculature of
solid tumors. VTAs are multifunctional molecules that target the capillaries and
blood vessels of solid tumors. Once there, these agents block the flow of oxygen
and nutrients to the underlying tissue by creating a blood clot in the tumor.
Within hours of the clot's formation, the tumor begins to die and necrotic
regions are formed. Since every tumor in excess of 2mm in size forms an
expanding vascular network during tumor growth, VTAs could be effective against
all types of solid tumors. Techniclone's scientists are doing preliminary
studies on Vascular Targeting Agents. The VTA technology was acquired in April
of 1997 through the Company's acquisition of Peregrine Pharmaceuticals, Inc.

Vasopermeation Enhancement Agents (VEAs) use vasoactive compounds
(molecules that cause tissues to become more permeable) linked to monoclonal
antibodies, such as the TNT antibody, to increase the vasoactive permeability at
the tumor site and act to increase the concentration of killing agents at the
core of the tumor. In pre-clinical studies, Techniclone's scientists were able
to increase the uptake of drugs or isotopes within a tumor by 200% to 400% if a
vasoactive agent was given several hours prior to the therapeutic treatment. The
therapeutic drug can be a chemotherapy drug, a radioactive isotope or other
cancer fighting agent. This enhancement of toxic drug dosing is achieved by
altering the physiology and, in particular, the permeability of the blood
vessels and capillaries that serve the tumor. As the tumor vessels become more
permeable, the amount of therapeutic treatment reaching the tumor cells
increases.

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CANCER: THE DISEASE AND CONVENTIONAL TREATMENTS

Cancer is a family of more than one hundred diseases that can be
categorized into two broad groups: (i) non-solid tumor cancers such as
hematological or blood-borne malignancies, including lymphomas and leukemias,
and (ii) solid tumor cancers, such as brain, lung, prostate, breast and colon
cancers. All cancers are generally characterized by a breakdown of the cellular
mechanisms that regulate cell growth and cell death in normal tissues. In the
U.S. alone, there are over 1.3 million new cases of cancer diagnosed each year,
of which, approximately 1.2 million are solid tumors.

Non-Hodgkins B-cell lymphomas are non-solid, blood borne cancers of the
immune system which currently afflict approximately 240,000 patients in the
United States. More than 55,000 new cases are expected to be diagnosed in 1998.
Non-Hodgkins lymphomas are generally classified into one of three groups: low,
intermediate or high grade.

Blood-borne cancers involve a disruption of the developmental processes
of blood cell formation, preventing these cells from functioning normally in the
blood and lymph systems. While chemotherapy is the primary treatment for
blood-borne malignancies, many such malignancies are radiosensitive and some
localized lymphomas can be treated with conventional external beam radiation
therapy. However, conventional external beam radiation therapy cannot be used in
the treatment of most blood-borne malignancies because the levels of radiation
necessary to destroy diseases that are disseminated within the body would result
in damage to the bone marrow of the patient, leading to life-threatening
suppression of the immune system, and other serious side effects.

Non-Hodgkins lymphomas are usually widely disseminated and
characterized by multiple tumors at various sites throughout the body. Treatment
usually consists of chemotherapy and often results in a limited number of
durable remissions. Lymphomas typically become more aggressive upon relapse and
tend to progress from low to intermediate or high grade during the disease
cycle. The majority of patients in remission will relapse and ultimately die
either from their cancer or complications of standard therapy. Fewer patients
achieve additional remissions following relapse and those remissions are
generally of shorter duration as the tumors become increasingly resistant to
subsequent courses of chemotherapy. Therapeutic product development efforts for
these cancers have focused on both improving treatment results and minimizing
the toxicities associated with standard treatment regimens. Immunotherapies with
low toxicity and demonstrated efficacy can be expected to reduce treatment and
hospitalization costs associated with therapy side effects or peripheral
infections, which can result from the use of chemotherapy and radiation therapy.

In solid tumor cancers, malignant tumors invade and disrupt nearby
tissues and can also spread throughout the body or "metastasize." The impact of
these tumors on vital organs such as the brain, lungs and the liver frequently
leads to death. Surgery is used to remove solid tumors that are accessible to
the surgeon and can be effective if the cancer has not metastasized.
Conventional radiation therapy also can be employed to irradiate a solid tumor
and surrounding tissues and is a first-line therapy for inoperable tumors, but
side effects are a limiting factor in treatment. Conventional external beam
radiation therapy is used frequently in conjunction with surgery either to
reduce the tumor mass prior to surgery or to destroy tumor cells that may remain
at the tumor site after surgery. While surgery and radiation therapy are the
primary treatments for solid tumors, chemotherapy is often used as a primary
therapy for inoperable or metastatic cancers.

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The Company is currently in Phase I clinical trials for treatment of
malignant glioma, a solid tumor cancer and the most common type of a primary
malignant brain tumor. Glioma grows rapidly, is debilitating and is almost
always fatal. Within the brain, gliomas (tumors that grow from glial cells)
usually occur in the cerebral hemispheres but may also strike other areas,
especially the optic nerve, the brain stem, and particularly among children, the
cerebellum. Within the next 12 months, over 100,000 people in the United States
will be diagnosed with a primary or metastatic brain tumor, and the incidence is
on the rise. Brain tumors are the second leading cause of cancer death in
children under age 15 and in young adults up to age 34. Conventional treatments
for brain tumors include surgery, radiation treatment and/or chemotherapy.

Chemotherapy, which typically involves the intravenous administration
of drugs designed to destroy malignant cells, is used for the treatment of both
solid tumors and blood-borne malignancies. Chemotherapeutic drugs generally
interfere with cell division and are therefore more toxic to rapidly dividing
cancer cells. Since cancer cells can often survive the effect of a single drug,
several different drugs usually are given in a combination therapy designed to
overwhelm the ability of cancer cells to develop resistance to chemotherapy.
Combination chemotherapy is used widely as first-line therapy for leukemias and
lymphomas and has had considerable success in the treatment of some forms of
these cancers. Nevertheless, partial and even complete remissions obtained
through chemotherapy often are not durable, and the cancer may reappear and/or
resume its progression within a few months or years of treatment. The relapsed
patient's response to subsequent therapy typically becomes shorter and shorter
with each successive treatment regimen as the cancer becomes resistant to
chemotherapy. Eventually, patients may become "refractory" to chemotherapy,
meaning that the length of their response, if any, to treatment is so brief that
the treating physician concludes that further chemotherapy regimens would be of
little or no benefit. Chemotherapeutic drugs are not sufficiently specific to
cancer cells to avoid affecting normal cells, especially those cells that are
growing rapidly. As a result, patients often experience side effects such as
nausea, vomiting, hair loss, anemia and fatigue, as well as life-threatening
side effects such as immune system suppression. In cases of certain severe
blood-borne malignancies and metastatic solid tumor cancers, bone marrow
transplants may be performed to treat patients who typically have exhausted all
other treatment options. Transplants generally are performed in connection with
regimens of aggressive chemotherapy and/or radiation therapy.



EMERGING METHODS OF CANCER TREATMENT - MONOCLONAL ANTIBODY TECHNOLOGY

Scientific progress in recent years has yielded a number of promising
cancer treatment approaches. These approaches generally are designed to enhance
the specificity and potency of cancer therapeutics, to improve overall efficacy
and to reduce side effects. The Company believes that one of the most promising
of these approaches is the use of monoclonal antibody technologies in the
development of anti-tumor targeting agents for cancer therapy.

ANTIBODIES. Antibodies are protein molecules produced by certain white
blood cells, known as lymphocytes, in the blood, spleen and lymph nodes, which
are part of the immune system in humans and certain animals, in response to the
presence of foreign substances (antigens) in the body. Each antibody recognizes
and binds to one or a very few specific sites on a specific antigen. This
quality, known as specificity, is the basis for using antibodies to diagnose
diseases or deliver drugs to disease sites, and to detect subtle differences
between malignant and normal cells. Once a

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lymphocyte comes in contact with an invading antigen, it begins to generate
identical offspring cells (clones) producing identical antibodies that bind to
the antigen. Each of these antibodies recognizes and binds in exactly the same
way to the antigen. This binding process sets in motion a complex series of
events which normally permits the body to eliminate the antigen.

In a healthy person or animal, hundreds of millions of antibodies are
produced as a defense mechanism when the body is invaded by antigens. Different
lymphocytes will, however, recognize an invading antigen in slightly different
ways. As a result, the clones produced by each lymphocyte will produce
antibodies which bind to different sites on the antigen. Each antibody carries a
genetically determined sequence of seven to eleven amino acids; this chemical
sequence creates a unique site for recognizing and attaching to a corresponding
antigen. Changing any amino acid in the chemical sequence could produce a
different antibody which would recognize and bond with different antigens.

Chimeric antibodies are constructed from portions of murine (mouse)
antibodies and human antibodies which are linked together. A chimeric antibody
consists mostly of human protein, with a small amount of murine protein carrying
the specificity site. Like fully human antibodies, chimerics are regarded as
less foreign to the human body than whole murine antibodies and are suited to
multiple treatments in-vivo. Techniclone has prepared chimerics of Oncolym(R)
and TNT at its research laboratories.

Fully human antibodies are more compatible with the human immune system
and thus should be able to avoid most of the immune response and bodily
rejection complications which may be encountered in using murine or chimeric
antibodies for cancer therapy. A human TNT antibody has been completed by
Cambridge Antibody Technology, Inc. (CAT) (see Licensing, Financing and Other
Arrangements for further development and use by the Company).

THERAPEUTIC APPLICATIONS. Cancer therapy utilizing monoclonal
antibodies, whether used alone or conjugated with other substances that attack
cancerous cells, directly attack the cancerous cells, leaving most healthy cells
unharmed. Consequently, cancer therapies based upon monoclonal antibodies have
the potential for more effective treatments without the harmful side effects
associated with most cancer therapies. Research in this area has indicated that
certain monoclonal antibodies are effective in the treatment of certain types of
cancers, including lymphoma. In limited clinical trials, the Company's
Oncolym(R) product appears to be an effective treatment for lymphoma, a form of
cancer of the lymph nodes and blood lymphocytes.

Research has also indicated that many monoclonal antibodies have
greater potential for fighting cancers and other diseases in the body when
conjugated with drugs, biologics, toxins or isotopes. Because of the great
specificity of monoclonal antibodies, they can deliver the conjugated drug,
biological, toxin or isotope directly to the selected target cells without
clinically significant toxicity to other cells in the body. The conjugated
monoclonal antibody binds to its target cell, which internalize the conjugated
drug, biological, toxin or isotope, causing cell death.

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TECHNICLONE'S APPROACHES TO CANCER THERAPY

Techniclone's scientific team has formulated a comprehensive new
approach to the treatment of cancerous tumors. For non-solid tumor therapy
(hemotological malignancies, including lymphomas and leukemias) the Company has
developed Oncolym(R), a direct tumor targeting agent, which is currently in a
Phase II/III clinical trial in the U.S. for treatment of intermediate and high
grade non-Hodgkins B-cell lymphoma.

Direct tumor targeting for solid tumors (lung, prostate, breast,
pancreatic, brain and colon cancers) has historically been proven to be
ineffective since: (i) cell-surface antigens are unstable and modulate, causing
the antigen target on the solid tumor to disappear; (ii) the same cell-surface
antigen used as the antibody target will frequently be expressed on normal,
healthy, cells as well, causing unacceptable levels of toxicity and adverse side
effects during therapy; and (iii) cell-surface antigens vary greatly from tumor
type to tumor type requiring the development of a different antibody targeting
system for each cancer type.

To solve the problems associated with direct tumor targeting for solid
tumors, Techniclone has concentrated its development efforts on an indirect
targeting approach by targeting anatomical structures essential for tumor growth
and the by-products of tumor growth, most notably necrotic tissue. This strategy
of targeting peripheral structures and cell types, rather than directly
targeting of the viable cancer cell itself, as a means to treat solid tumor
cancers is broadly described as "collateral targeting". The Company holds
fundamental patents for three of the most important new classes of compounds to
have emerged in the field of collateral targeting, Tumor Necrosis Therapy (TNT),
Vascular Targeting Agents (VTA) and Vasopermeation Enhancement Agents (VEA).

The Company believes that the use of collateral (indirect) targeting
agents for solid tumor therapy might solve some of the problems associated with
conventional chemotherapy and radiation therapy, and problems encountered in the
early industry testing of direct targeting approaches to solid tumor therapy.
The main advantage of collateral targeting agents is that the targeted tumor
structures appear to be common to all solid tumors, such that one targeting
agent may be effective for a wide-range of solid tumor types. Additionally,
since collateral targeting agents target the non-mutable components of the
tumor, the potential for the development of drug resistance by the tumor is
reduced.

ONCOLYM(R) FOR NON-SOLID TUMOR THERAPY

Techniclone's first proprietary monoclonal antibody cancer therapy
product LYM-1 (which will be marketed under the tradename Oncolym(R)) is now in
a Phase II/III multi-center clinical trial. LYM-1 (Oncolym(R)) is designed as a
therapy against non-Hodgkins B-cell lymphoma cancer. Techniclone's Oncolym(R)
antibody is linked to a radioactive isotope (I131), and the combined molecule is
injected into the blood stream of the cancer patient where it recognizes and
binds to the cancerous lymphoma tumor sites, thereby delivering the radioactive
isotope to the tumor site, with minimal adverse effect on surrounding healthy
tissue.

In Phase II trials of non-Hodgkin's lymphoma patients treated with
LYM-1 (Oncolym(R)) at varying dose levels, fifty-six percent (56%) of the trial
participants had complete or partial (greater than 50% tumor shrinkage)
remissions of their tumors. It should be noted that these Phase II clinical
trial results were achieved with terminal patients whose disease was progressing
despite conventional chemotherapy and who were diagnosed as having a life
expectancy of from two to six months.


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A Phase II/III clinical trial of the Oncolym(R) antibody is being
conducted by Techniclone at several clinical sites with the current expectation
that the study will ultimately be expanded to include up to ten sites with an
expected enrollment of up to 100 evaluable patients. The Oncolym(R) clinical
trial includes patients with intermediate- or high-grade relapsed or refractory
non-Hodgkins B-cell lymphoma that have failed two prior chemotherapy treatments.
The current clinical trial protocol includes treatment of patients with two
therapeutic doses of radiolabeled Oncolym(R) given six weeks apart. The
therapeutic radiation dosage level being used in the current Phase II/III
protocol is expected to comply with Nuclear Regulatory Commission guidelines for
outpatient treatment at most medical institutions.

COLLATERAL TARGETING AGENTS FOR SOLID TUMOR THERAPY

Techniclone has developed two advanced monoclonal antibody technologies
for collateral targeting of solid tumors for cancer therapy and acquired one
collateral targeting technology with the acquisition of Peregrine. Tumor
Necrosis Therapy (TNT) and Vascular Targeting Agents (VTAs) are possible
stand-alone or combined cancer therapy technologies, but when used in
combination with Vasopermeation Enhancement Agents (VEAs), these technologies
form a complete three-pronged platform which is designed to potentially
eradicate most solid tumors.

TUMOR NECROSIS THERAPY (TNT). Tumor Necrosis Therapy represents an
entirely new approach to cancer therapy. Instead of targeting living cancer
cells, TNT targets dead and dying cells because such cells account for up to 50%
of the mass of a tumor and are found primarily at the tumor core. TNT binds to
DNA or DNA-associated proteins, such as histones, found within the nucleus of
every cell. TNT is not able to discriminate between DNA found in living cells
and DNA found in dead cells but, rather, is only able to bind to DNA in cells
having porous nuclear and cellular membranes. Since porosity is a property
uniquely associated with dead and dying cells, the DNA functions as a highly
abundant but selective target. This DNA target is not believed to modulate as do
targets associated with other tumor-specific cell surface antigens that are
commonly used as targets with other antibody-based therapeutic modalities. Once
concentrated in necrotic regions throughout the tumor, radiolabeled TNT can
potentially bombard neighboring viable cancer cells with beta radiation for up
to twelve days.

Each successive treatment with TNT potentially kills more cancer cells,
thereby, increasing the necrotic area of the tumor. Thus, TNT potentially
becomes more effective upon subsequent doses, contrary to conventional
chemotherapy, which becomes less effective with subsequent doses due to
increased drug resistance. Additionally, since radioactive isotopes have a large
killing radius of 100-300 cell layers around the isotope, TNT might be effective
in most areas of the tumor having small pockets of necrosis surrounded by viable
tumor cells. In essence, TNT potentially destroys the tumor from the inside out.
The TNT targeting mechanism could be the basis for a class of new products
effective across a wide-range of solid tumor types, including brain, lung,
colon, breast, liver, prostate and pancreatic cancers.

The Company's first TNT based product is an investigational chimeric
monoclonal antibody radiolabeled with the isotope, I131. During March 1998, the
Company began enrolling patients into a Phase I study of TNT or the treatment of
malignant glioma (brain cancer). The treatment protocol uses an interstitial
delivery system pioneered by the National Institutes of Health (NIH). The
interstitial delivery system pioneered by the NIH uses a low-pressure
intra-tumoral catheter reported to deliver therapeutic agents to large regions
of the brain by increasing bulk flow and producing interstitial convection. The
Phase I clinical investigation is


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designed to assess the safety and tolerability of interstitially administered
TNT antibody. The protocol includes up to 24 patients with recurrent
supratentorial anaplastic astrocytoma and glioblastoma multiforme. Patients will
include those who are candidates for surgical treatment and patients for which
surgical tumor debulking is not possible. The Company amended the Phase I trial
protocol in July 1998, to allow for patient specific dosing of TNT based on the
volume of the specific brain tumor. The radiolabeled antibody will be
administered by continuous infusion through a stereotactically placed
intra-tumoral catheter over 24 hours. Endpoints in the study include safety,
determination of the maximum tolerated dose, pharmacokinetic profile, and
radiation dosimetry. The clinical trials are currently being conducted at The
Medical University of South Carolina with additional clinical sites to be added
in the future.

VASCULAR TARGETING AGENTS (VTAs). The VTA technology was acquired in
April 1997 through the Company's acquisition of Peregrine Pharmaceuticals, Inc.
VTAs are molecules that target the blood vessels of tumors and act to kill solid
tumors by destroying these blood vessels. After attaching to the endothelial
cells which line the tumor blood vessels, the VTA induces a blood clot in the
tumor blood vessels causing the flow of oxygen and nutrients to the tumor cells
to cease. Without adequate oxygen and nutrients, the tumor dies and necrotic
regions are formed.

VTAs act on the endothelial cells lining the blood vessels of tumors,
not on the tumor cells themselves. This method of delivery is believed to be
advantageous, when compared to the method of delivery of conventional cancer
drugs, because VTAs are not required to penetrate the tumor directly to obtain a
therapeutic response. On the other hand, conventional cancer drug agents must
migrate out of the blood vessels and into the tumor tissue to be effective.
Penetration of the tumor by conventional cancer drug agents, particularly the
inner core of the tumor, has been proven difficult to accomplish.

VTAs have the potential to be effective against a wide variety of solid
tumors since every solid tumor in excess of two millimeters must form a vascular
network to survive and tumor vasculature is believed to be consistent among
various tumor types.

Additionally, a potential advantage of the VTA approach is that the
endothelial cells targeted by VTAs do not mutate to become drug resistant. Drug
resistance caused by the instability and mutability of cancer cells is a major
problem with conventional therapeutic agents which must directly target the
cancer cells of the tumor.

Techniclone's scientists continue to perform preclinical studies on
VTAs. In these preclinical or animal studies, VTAs have shown that within hours
after administration, clots form in the tumor vasculature and the tumor cells
begin to die. Within days, large tumor masses have been shown to disintegrate
and have left nearby healthy tissue intact and fully functional.

The VTA technology differs from conventional anti-angiogenesis therapy
in that VTAs act by shutting off the supply of oxygen and nutrients to tumor
cells by inducing clot formation in existing tumor blood vessels. By contrast,
anti-angiogenesis compounds typically work by inhibiting the growth of new tumor
blood vessels. In inhibiting the growth of new tumor blood vessels, tumor growth
may be diminished, but the existing tumor can maintain its bulk by utilizing the
existing tumor blood vessels. The VTA approach, therefore, is designed to
provide a therapeutic effect for the debulking of existing tumors.


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VASOPERMEATION ENHANCEMENT AGENTS (VEAs). Vasopermeation Enhancement
Agents use vasoactive compounds (molecules that cause tissues to become more
permeable) linked to monoclonal antibodies, such as the TNT antibodies, to
increase the vasoactive permeability at the tumor site and act to increase the
concentration of killing agents at the core of the tumor. Vasopermeation
Enhancement Agents are administered to a cancer patient by pretreating the
patient with a vasoconjugate, such as Interleukin-2 (IL-2) linked to a
monoclonal antibody, a few hours prior to delivery of a therapeutic agent. The
antibody side of this vasoconjugate may be targeted either against antigens
which are unique to the tumor vessel walls or antigens inside the tumor itself.
The vasoconjugate affects the walls of the tumor vessel and causes an immediate
increase in vessel permeability thereby causing these tissues to become a "sink"
for other compounds that are subsequently given intravenously. This increased
state of permeability creates a window of opportunity for several hours,
allowing any therapeutic drug injected into the patient during that time to
enter the tumor in greatly enhanced concentrations. In pre-clinical studies,
Techniclone's scientists were able to increase the uptake of drugs or isotopes
within a tumor by 200% to 400% if a vasoactive agent was given several hours
prior to the therapeutic treatment. The therapeutic drug can be a chemotherapy
drug, radiolabeled antibody or other cancer fighting agent. This enhancement of
toxic drug dosing is achieved by altering the physiology and, in particular, the
permeability of the blood vessels and capillaries that serve the tumor. As the
tumor vessels become more permeable, the amount of therapeutic treatment
reaching the tumor cells increases. Techniclone's scientists are doing
preliminary studies on Vasopermeation Enhancement Agents.



LICENSING, FINANCING, AND OTHER ARRANGEMENTS

LICENSING ARRANGEMENTS. In 1985, the Company entered into a research
and development agreement with Northwestern University and its researchers to
develop antibodies known as LYM-1 (Oncolym(R)) and LYM-2 (collectively "the LYM
Antibodies"). Techniclone holds an exclusive world-wide license to manufacture
and market products using the LYM Antibodies. In exchange for the world-wide
license to manufacture and market the products, the Company will pay royalties
to Northwestern University of up to 6% of net sales (as defined in the
agreement) of the LYM-1 or LYM-2 products.

On October 28, 1992, the Company entered into an agreement with an
unrelated corporation (licensee) to terminate a previous license agreement
relating to the LYM Antibodies. The termination agreement provides for maximum
payments of $1,100,000 to be paid by the Company based on achievement of certain
milestones, including royalties on net sales. At April 30, 1998, the Company had
paid $100,000 and accrued an additional $100,000 relating to the termination
agreement. There have been no sales of the related products through April 30,
1998. Future maximum commitments under the agreement are $900,000.

On February 29, 1996, the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. (BTD), a limited partnership controlled by
a director and a shareholder of the Company. Under the terms of the agreement,
BTD was granted the right to market and distribute LYM products in Europe and
other designated foreign countries in exchange for a nonrefundable fee of
$3,000,000 and the performance of certain duties by BTD as outlined in the
agreement. The agreement also provides that the Company will retain all
manufacturing rights to the LYM Antibodies and will supply the LYM Antibodies to
BTD at preset prices. In conjunction with the agreement, the Company was granted
an option to repurchase the marketing rights to the

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LYM Antibodies through August 29, 1998 at its sole discretion. The repurchase
price under the option, if exercised by the Company, would include a cash
payment of $4,500,000, the issuance of stock options for the purchase of
1,000,000 shares of the Company's common stock at a price of $5.00 per share
with a five year term, and royalty equal to 5% of gross sales on LYM products in
designated geographic areas.

During February 1996, the Company entered into a joint venture
agreement with Cambridge Antibody Technology, Inc. (CAT), an unrelated entity,
which provides for the co-sponsorship of development and clinical testing of
chimeric and human TNT antibodies. As part of the joint venture agreement, CAT
maintained the responsibility to construct human TNT antibodies for future joint
clinical development and testing. A human TNT antibody was completed by CAT in
early 1998. The agreement also provides that equity in the joint venture and
costs associated with the development of TNT-based products would be shared
equally and the Company would retain exclusive world-wide manufacturing rights.
In May 1998, the Company and CAT elected to discontinue the co-sponsorship of
the development of the TNT antibodies and the Company assumed full
responsibility to fund development and clinical trials of the TNT antibody. As a
result of the modification in the joint venture agreement, royalties on future
sales of products which use the TNT antibody have been decreased to be no more
than 12.5%. The Company and CAT are currently in negotiations regarding
modifications to the joint venture arrangement.

In April 1997, in conjunction with the acquisition of Peregrine
Pharmaceuticals, Inc., the Company gained access to certain exclusive licenses
for Vascular Targeting Agents (VTAs) technologies. In connection with obtaining
these rights, the Company will be required to pay an aggregate of $787,500 upon
attainment of defined milestones, $300,000 upon commercial introduction of
second and each succeeding product encompassing the related technology and
royalties ranging from 2% to 4% of net sales of the related products.

On November 14, 1997, the Company entered into a Termination and
Transfer Agreement (the "Agreement") with Alpha Therapeutic Corporation (Alpha),
whereby the Company reacquired the rights for the development, commercialization
and marketing of the LYM-1 (Oncolym(R)) antibody and LYM-2 antibodies
(collectively "the LYM Antibodies") in the United States and certain other
countries, previously granted to Alpha in October 1992. Under the terms of the
Agreement, the Company paid Alpha $260,000 upon signing of the agreement, and is
required to pay Alpha: (i) $250,000 upon enrollment of the first clinical trial
patient by the Company, (ii) $1,000,000 upon filing of a BLA and (iii)
$1,000,000 upon FDA approval of a BLA, and (iv) royalties equal to 2% of net
sales for product sold in North, South and Central America and Asia for five (5)
years after commercialization of the product. Under the Agreement, $510,000 was
expensed in fiscal year 1998, of which, $250,000 was due and payable at April
30, 1998.

The Company has additional licensing arrangements and is currently
negotiating with certain third parties to acquire licenses needed to produce and
commercialize chimeric and human antibodies, including the Company's TNT
antibody. These licenses are generally available from the licensors to all
interested parties. The terms of the licenses, obtained and expected to be
obtained, are not expected to significantly impact the cost structure or
marketability of chimeric or human based products.

Prior to fiscal year 1996, the Company entered into several license
and research and development agreements with a university for the exclusive,
worldwide licensing rights to use certain patents and technologies in exchange
for fixed and contingent payments and royalties ranging from 2% to 6% of net
sales of the related products. Certain of these agreements also provide for
reduced

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royalty payments if the technology is sublicensed or if products incorporate
both the licensed technology and another technology. Some of the agreements are
terminable at the discretion of the Company while others continue through 2001.
Minimum royalties under these agreements are $86,500 annually.

FINANCING ARRANGEMENTS. During December 1995, the Company issued 8,200
shares of Class B Convertible Preferred Stock (Class B Stock), at a price of
$1,000 per share, for net proceeds of $7,137,544. The Class B Stock was
non-voting and was convertible into common stock of the Company at variable
prices as defined in the agreement. During fiscal years ended April 30, 1996,
1997 and 1998, 1,400, 4,600 and 2,200 shares of Class B Stock were converted
into 469,144, 1,587,138 and 4,388,982 common shares, respectively. At April 30,
1998, no shares of Class B Stock remained outstanding.

On April 25, 1997, the Company issued 12,000 shares of 5% Adjustable,
Convertible Class C Preferred Stock (Class C Stock), at a price of $1,000 per
share, for net proceeds of $11,068,971. The holders of the Class C Stock do not
have voting rights except as provided under Delaware law and the Class C Stock
is convertible into common stock of the Company. In conjunction with the
issuance of the Class C Stock, the Placement Agent was granted a warrant to
purchase 1,200 shares of Class C Stock for $1,000 per share, expiring in April
2002.

Commencing September 26, 1997, the Class C Stock was convertible at the
option of the holder into a number of shares of common stock of the Company as
determined by dividing $1,000 plus all accrued but unpaid dividends by the
Conversion Price. The Conversion Price is the lower of the average of the lowest
trading price of the Company's common stock for the five consecutive trading
days ending with the trading day prior to the conversion date reduced by 27
percent (effective July 26, 1998) or $.5958 per share (Conversion Cap). The
Class C Stock agreement also provides that upon conversion, the holders of Class
C Stock also receive Warrants to purchase one-fourth of the number of shares of
common stock issued upon conversion at $.6554 or 110% of the Conversion Cap. The
warrants expire in April 2002. During fiscal year 1998, 8,636 shares of Class C
Stock were converted into 15,542,300 common shares and warrants for the purchase
of 3,885,515 shares were issued. During fiscal year 1998, under the terms of the
Placement Agent Warrant, the Placement Agent purchased 670 shares of Class C
Stock for proceeds of $670,000. In May 1998, the Placement Agent exercised its
remaining shares provided for under the Warrant and purchased 530 shares of
Class C Stock for proceeds of $530,000.

Dividends on the Class C Stock are payable quarterly in shares of Class
C Stock or cash at the rate of $50.00 per share per annum, at the option of the
Company, beginning September 30, 1997. During fiscal year 1998, the Company
issued 448 Class C Stock dividend shares and paid cash dividends of $12,473 for
fractional shares thereon. During fiscal year 1998, the Registration Statement
required to be filed by the Company pursuant to the Agreement was not declared
effective by the 180th day following the Closing Date, and therefore, the
Company was required to issue an additional 325 shares of Class C Stock,
calculated in accordance with the terms of the agreement.

The Class C Stock is subject to mandatory redemption upon certain
events as defined in the Class C Stock agreement. Some of the mandatory
redemption features are within the control of the Company. For those mandatory
redemption features that are not within the control of the Company, the Company
has the option to redeem the Class C Stock in cash or common stock.


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No warrants were exercised during the fiscal year ended April 30,
1998, and no value has been ascribed to these warrants, as the warrants are
considered non-detachable.

The agreement also provides that the Company may, upon 20 days notice
(the Notice Period), redeem the warrants for $.01 per share provided that the
closing bid price of the Company's common stock equals or exceeds $.98 per share
for the 20 most recent consecutive trading days prior to the redemption date,
including the Notice Period. The warrant holder may exercise the warrants for
cash, on a cashless basis, or a combination thereof. On July 17, 1998, the
Company notified the holders of the Class C Stock of its intention to redeem the
Stock Purchase Warrants (Warrants) issued in conjunction with the 5% Adjustable
Class C Preferred Stock (Class C Stock) financing. The redemption notice
provides that all of the outstanding Warrants will be redeemed, if not converted
on or before August 6, 1998. Under the terms of the financing, upon conversion
of the Class C Stock, the holders of the Class C Stock were granted Warrants to
purchase one-fourth of the common stock issued upon conversion for $.6554 per
share. Upon delivery of a notice of redemption to the warrantholder by the
Company, the warrantholder may exercise the Warrants for cash, on a cashless
basis or any combination thereof. Assuming a closing bid price of the Company's
common stock of $1.50 per share, if the warrantholders elect to exercise on a
cashless basis, the Company will issue approximately 2,295,000 shares of its
common stock. If all of the warrantholders elect to exercise on a cash basis,
the Company will receive approximately $2,672,000 and will issue approximately
4,076,000 shares of its common stock. Should the closing bid price of the
Company's common stock be less than $.98 during the period from July 17, 1998
through August 6, 1998, the Company's redemption of the warrants will be
nullified. If the warrant redemption is nullified, the Company will not receive
any proceeds from the warrant redemption and any unexercised warrants could
remain outstanding at the election of the warrantholder.

Subsequent to April 30, 1998, and through July 17, 1998, 4,983 shares
of Class C were converted into 9,036,137 shares of common stock and warrants to
purchase an additional 2,259,022 shares were issued. In addition, warrants to
purchase 2,068,380 shares of common stock were exercised for proceeds of
approximately $1,356,000 during that same period. At July 17, 1998, 354 shares
of Class C Stock and warrants to purchase 4,076,157 shares of common stock
remained outstanding.

Both the Class B Stock and the Class C Stock agreements include
provisions for conversion of the preferred stock into common stock at a discount
during the term of the agreements. As a result of these conversion features, the
Company is accreting an amount from accumulated deficit to additional paid-in
capital equal to the Preferred Stock discount. The Preferred Stock discount was
computed by taking the difference between the fair value of the Company's common
stock on the date the Preferred Stock agreements were finalized and the
conversion price (assuming the maximum discount allowable under the terms of the
agreement) multiplied by the number of common shares into which the preferred
stock would have been convertible into (assuming the maximum discount
allowable). The Preferred Stock discount is being amortized over the period from
the date of issuance of the Preferred Stock to the Conversion or discount period
(three months for the Class B and sixteen months for the Class C) using the
effective interest method. If preferred stock conversions occur before the
maximum discount is available, the discount amount is adjusted to reflect the
actual discount. During fiscal year 1996, the Company recorded the total Class B
Stock discount of $5,327,495. No discount was recorded in fiscal year 1997.
During fiscal year 1998, the


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Company recorded $2,475,584 for the Class C Stock discount. If the remaining
4,807 shares of Class C Stock are converted when the maximum 27% discount is
available, the remaining discount to be amortized would be approximately
$825,000 in fiscal year 1999.

In April 1998, through a private placement, the Company sold 1,120,065
shares of restricted common stock for $625,000, including 84,034 shares to an
officer of the Company. In conjunction with the private placement, the Company
granted warrants to purchase 280,015 shares of its common stock at $1.00 per
share. The warrants expire in April 2001.

During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line (Equity Line) with two institutional investors. The
Equity Line expires in June 2001. Under the terms of the Equity Line, the
Company may, in its sole discretion, and subject to certain restrictions,
periodically sell ("Put") shares of the Company's common stock for up to
$20,000,000 upon the effective registration of the Put shares. After effective
registration for the Put shares, unless an increase is otherwise agreed to,
$2,250,000 of Puts can be made every quarter, subject to share issuance volume
limitations identical to those set forth in Rule 144(e). At the time of each
Put, the investors will be issued a warrant, expiring on December 31, 2004, to
purchase up to 10% of the amount of common stock issued to the investor at the
same price at the time of the Put.

The Equity Line provides for immediate funding of $3,500,000 in
exchange for 2,545,454 shares of common stock. One-half of this amount is
subject to adjustment at three months after the effective date of the
registration statement registering these shares with the second half subject to
adjustment six months after such effective date of the registration of these
shares. At each adjustment date, if the market price at the three or six month
period ("Adjustment Price") is less than the initial price paid for the common
stock, the Company will be required to issue additional shares of its common
stock equal to the difference between the amount of shares which would have been
issued if the price had been the Adjustment Price for $1,750,000. The Company
will also be required to issue additional warrants at each three month and six
month period for 10% of any additional shares issued. Future Puts under the
Equity Line will be priced at a 15% discount on the 10 day low closing bid
price.

OTHER ARRANGEMENTS. During the fiscal years ended April 30, 1996 and
1997, the Company acquired land and two buildings for an aggregate purchase
price of approximately $3,186,000. In conjunction with the purchase of these
buildings, the Company entered into two Promissory Notes (the Notes) aggregating
$2,040,000 in original principal amount. The Notes are secured by Deeds of
Trust, Assignments of Leases and Rents and Commercial Security Agreements. The
Notes provide for aggregate monthly payments, including interest, of $21,470 per
month with interest calculated at LIBOR plus 4.250 percent. Pursuant to the
terms of the Notes, the interest rate cannot be greater than 14.5% nor less than
9.5%.

The Company has incurred significant construction costs in connection
with the upgrading and expansion of its antibody production facility. On April
8, 1998, the Company financed approximately $1,885,000 in construction costs
that were due and payable and received an additional $500,000 in working capital
funding from the construction company that had improved the manufacturing
facility. Under this financing arrangement, the construction costs and
additional funding were to be payable on June 30, 1998, with interest at a
bank's prime rate plus 5%, payable in common stock of the Company at $1.00 per
share. The loans are collateralized by the Company's facilities. In conjunction
with this financing, the Company issued a warrant, expiring in March 2001, to
purchase up to 240,000 shares of the Company's common stock at $.5625 per share.


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In July 1998, in conjunction with a pending sale/leaseback transaction
with another unrelated entity, the Company renegotiated the financing agreement
to provide for an immediate payment of $500,000 to be made by the Company and an
extension of time to pay the remaining balance of approximately $1,885,000 to
August 17, 1998. Interest on the remaining balance is payable under the same
terms as the original note. In connection with the extension agreement, the
Company issued an additional warrant, expiring in July 2001, to purchase up to
95,000 shares of the Company's common stock at $1.37 per share.

During that same period, the Company entered into an agreement for the
sale and subsequent leaseback of its facilities, which consists of two buildings
located in Tustin, California. The sale/leaseback transaction is with an
unrelated entity and provides for the leaseback of the Company's facilities for
a ten-year period with two five-year options to renew. Proceeds from the sale of
the Company's facilities are expected to be sufficient to retire the mortgage
notes payable on the facilities as well as the amounts owed to the contractor
for the upgrade and expansion of its antibody production facilities. As the
sale/leaseback agreement is in escrow and subject to completion of normal due
diligence procedures by the buyer, there is no assurance that the transaction
will be completed on a timely basis or at all. Should the transaction not be
completed by August 17, 1998, the Company would be required to utilize current
cash funds to retire the $1,885,000 remaining balance owed to the contractor and
would be required to find another buyer for the building or obtain alternative
sources of financing.


COMPETITION

The Company's competitive position is based on its proprietary
technology and know-how, U.S. patents covering the LYM Antibodies and its
collateral targeting agent technologies, including TNT, for therapy of human
cancers. The Company has a number of worldwide patents issued and pending. The
Company plans to compete on the basis of the advantages of its technologies, the
quality of its products, and its commitment to research and develop innovative
technologies.

Various other companies, many of which have larger financial resources
than the Company, are currently engaged in research and development of
monoclonal antibodies and in cancer prevention and treatment. There can be no
assurance that such companies, other companies or various other academic and
research institutions will not develop and market monoclonal antibody products
or other products to prevent or treat cancer prior to the introduction of, or in
competition with, the Company's present or future products. In addition, there
are many firms with established positions in the diagnostic and pharmaceutical
industries which may be better equipped than the Company to develop monoclonal
antibody technology or other products to diagnose, prevent or treat cancer and
to market their products. Accordingly, the Company plans, whenever feasible, to
enter into joint venture relationships with these larger firms for the
development and marketing of specific products and technologies so that the
Company's competitive position might be enhanced.

The Company's first potential product, Oncolym(R), is a treatment for
intermediate and high grade non-Hodgkins lymphoma. The Company's two principal
competitors for the non-Hodgkins lymphoma market are Coulter Pharmaceutical,
Inc. ("Coulter") and IDEC Pharmaceuticals Corporation ("IDEC"), who are
currently testing and/or marketing monoclonal antibody based products for the
low, intermediate, and high grade lymphoma market. Other companies are working
on monoclonal antibody based therapies which may compete with Oncolym(R).


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31

Coulter is developing a non-Hodgkins lymphoma murine sub-class
monoclonal antibody treatment, known as "B-1 Therapy", which is currently
awaiting submission of a BLA for FDA product approval. The Coulter antibody
targets the CD-20 antigen which is found on B cells and is labeled with
Iodine-131, a radioisotope. Coulter is initially pursuing clinical development
of its antibody for low-grade non-Hodgkins lymphomas. Coulter has announced that
it intends to seek to conduct clinical trials of its antibody treatment for
intermediate and/or high grade non-Hodgkins lymphomas.

IDEC has developed a non-Hodgkins lymphoma monoclonal antibody which
targets the CD-20 antigen. This non-radiolabeled antibody is designed to
activate the patients' own immune system. IDEC received FDA approval of this
antibody in 1997 and IDEC is currently marketing its product through a joint
venture with a large pharmaceutical company. This treatment is intended for
relapsed low grade non-Hodgkins lymphoma.

The Company's second potential product, Tumor Necrosis Therapy (TNT),
is currently in a Phase I clinical trial for the treatment of malignant glioma
(brain cancer). The treatment protocol uses an interstitial delivery system
pioneered by the National Institute of Health (NIH) to infuse I131 labeled
chimeric TNT directly to the tumor site. The Company knows of no similar
radiolabeled compound similarly administered, which is in clinical trials for
application to brain cancer. However, there may be alternative potential brain
cancer therapy approaches in development by others which may compete with the
Company's TNT product, if TNT is approved for sale.

The Company believes that its product development programs will be
subject to significant competition from companies utilizing alternative
technologies as well as to increasing competition from companies that develop
and apply technologies similar to the Company's technologies. Other companies
may succeed in developing products earlier than the Company, obtaining approvals
for such products from the FDA more rapidly than the Company or developing
products that are safer and more effective than those under development or
proposed to be developed by the Company. There can be no assurance that research
and development by others will not render the Company's technology or potential
products obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies.



GOVERNMENT REGULATION

Regulation by governmental authorities in the United States and other
countries is a significant factor in the Company's ongoing research and
development activities and in the production and marketing of its products. The
amount of time and expense involved in obtaining necessary regulatory approval
depends upon the type of product. The procedure for obtaining FDA regulatory
approval for a new human pharmaceutical product, such as Oncolym(R), TNT, VTA,
and VEA, involves many steps, including laboratory testing of those products in
animals to determine safety, efficacy and potential toxicity, the filing with
the FDA of a Notice of Claimed Investigational Exemption for Use of a New Drug
prior to the initiation of clinical testing of regulated drug and biologic
experimental products, and clinical testing of those products in humans. The
Company has filed a Notice of Claimed Investigational Exemption for Use of a New
Drug with the FDA for the production of Oncolym(R) and TNT as a material
intended for human use, but has not filed such a Notice with respect to any
other in vivo products. The regulatory approval process is administered


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by the FDA's Center for Biologics Research and Review and is similar to the
process used for any new drug product intended for human use.

The pre-marketing clinical testing program required for approval of a
new drug or biologic typically involves a three-phase process. Phase I consists
of testing for the safety and tolerance of the drug with a small group of
patients, and also yields preliminary information about the effectiveness of the
drug and dosage levels. Phase II involves testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. After completion of clinical studies for
a biologics product, a Biologics License Application (BLA) is submitted to the
FDA for product marketing approval and for licensing of the product
manufacturing facilities. In responding to such an application, the FDA could
grant marketing approval, request clarification of data contained in the
application or require additional testing prior to approval. The Company has
not, to date, filed a BLA for any of its products.

If approval is obtained for the sale of such new drug, FDA regulations
will also apply to the manufacturing process and marketing activities for the
product and may require post-marketing testing and surveillance programs to
monitor the effects of the product. The FDA may withdraw product approvals if
compliance with regulatory standards, including labeling and advertising, is not
maintained or if unforeseen problems occur following initial marketing. The
National Institutes of Health has issued guidelines applicable to the research,
development and production of biological products, such as the Company's
products. Other federal agencies and congressional committees have indicated an
interest in implementing further regulation of biotechnology applications. The
Company cannot predict, however, whether new regulatory restrictions on the
manufacturing, marketing, and sale of biotechnology products will be imposed by
state or federal regulators and agencies.

In addition, the Company is subject to regulation under state, federal,
and international laws and regulations regarding occupational safety, laboratory
practices, the use and handling of radioactive isotopes, environmental
protection and hazardous substance control, and other regulations. The Company's
clinical trial and research and development activities, involve the controlled
use of hazardous materials, chemicals and radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. In addition, disposal of radioactive materials used by
the Company in its clinical trials and research efforts may only be made at
approved facilities.

The Company's products may also be subject to import laws in other
countries, the food and drug laws in various states in which the products are or
may be sold and subject to the export laws of agencies of the United States
government.

The Company believes that it is in compliance with all applicable laws
and regulations including those relating to the handling and disposal of
hazardous and toxic wastes.


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33



PATENTS AND TRADE SECRETS

The Company has relied on the internal achievements, as well as the
direct sponsorship of university researchers, for development of its basic
technologies. The Company believes it will continue to learn, on a timely basis,
of advances in the biological sciences which might complement or enhance its
existing technologies. It intends to pursue opportunities to license its basic
technologies and any advancements or enhancements, as well as to pursue the
incorporation of its technologies in the development of its own products.

The Company has applied for several patents either directly or as a
cosponsor/licensee. The Company treats particular variations in the production
of monoclonal antibodies and radiolabeling of monoclonal antibodies and related
technologies as trade secrets.

Patent protection may, however, be significant in the case of newly
developed antibody-based technologies. The Company intends to pursue patent
protection for inventions related to antibody-based technologies that it cannot
protect as trade secrets. Techniclone, as licensee, cosponsored the patent
applications for the LYM Antibodies through its licensing agreements with
Northwestern University. United States Letters patents for LYM-1 and LYM-2 were
issued in February 1988.

The Company's TNT technologies are covered by a United States patent
issued in August 1989 for diagnostic and therapeutic monitoring, by a United
States patent issued in May 1991 for all therapeutic applications and a United
States patent is pending, for which the Company has received a notice of
allowance, for TNT imaging and therapeutic applications. The foreign
counterparts of these patents have been issued by the European Patent Office and
are still pending in several Asian countries.

For its Vasopermeation Enhancement Agents (VEAs) technology,
Techniclone holds an exclusive world-wide license from the University of
Southern California (USC) that covers all uses of the Vasopermeation Enhancement
technology and all related patents that may issue. USC has filed patent
applications covering the Vasopermeation Enhancement technology in the United
States, Europe, Japan, Canada and Australia. The United States patent
application was filed in October 1988 and is currently pending. This patent
covers vasoactive compounds attached to immunoreactive fragments for the purpose
of enhancing the uptake of therapeutic drugs or diagnostic agents. The European
patent application for Vasopermeation Enhancement was allowed in June 1995.

Techniclone's Modified Antibody Technology is covered by a U.S. patent
issued in March 1993. The European patent application for Modified Antibody
Technology was allowed in June 1996. Asian patent applications for Modified
Antibody Technology are pending as is a second United States patent application
covering further uses of the technology.

The Company's Vascular Targeting Agent (VTA) technologies, acquired
through the acquisition of Peregrine Pharmaceuticals, Inc. in April 1997, are
covered by numerous patents and patent applications. These technologies are
licensed from the University of Texas Southwestern Medical Center at Dallas, TX;
Beth Israel Hospital, Boston, MA; the Scripps Institute, La Jolla, CA and
Johnson & Johnson. These Patents and patent applications cover the generic idea
of clotting tumor vasculature as a means cancer therapy. The concepts covered by
these patents and patent applications include clotting tumor blood vessels
either by killing the tumor blood vessels which

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34

leads to clotting or by directly clotting the blood vessels by targeting natural
clotting proteins to the tumor blood vessels. The targeting methods described in
the patents and patent applications include markers expressed on, induced on,
associated with or otherwise localized on the tumor blood vessels.

Some of the Company's antibody production and use methods are patented
by third parties. The Company is currently negotiating with certain third
parties to acquire licenses needed to produce and commercialize chimeric and
human antibodies, including the Company's TNT antibody. These licenses are
generally available from the licensors to all interested parties. The terms of
the licenses, obtained and expected to be obtained, are not expected to
significantly impact the cost structure or marketability of chimeric or human
based products.

In general, the patent position of a biotechnology firm is highly
uncertain and no consistent policy regarding the breadth of allowed claims has
emerged from the actions of the U.S. Patent Office with respect to biotechnology
patents. Accordingly, there can be no assurance that the Company's patents,
those issued and those pending, will provide protection against competitors with
similar technology, nor can there be any assurance that such patents will not be
infringed upon or designed around by others.

International patents relating to biologics are numerous and there can
be no assurance that current and potential competitors have not filed or in the
future will not file patent applications or receive patents relating to products
or processes utilized or proposed to be used by the Company. In addition, there
is certain subject matter which is patentable in the United States and may not
generally be patentable outside of the United States. Statutory differences in
patentable subject matter may limit protection the Company can obtain on some of
its products outside of the United States. These and other issues may prevent
the Company from obtaining patent protection outside of the United States.
Failure to obtain patent protection outside the United States may have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company knows of no third party patents which are infringed by its
present activities or which would, without infringement or license, prevent the
pursuit of its business objectives. However, there can be no assurances that
such patents have not been or will not be issued and, if so issued, whether the
Company will be able to obtain licensing arrangements for necessary technologies
on reasonable terms. The Company also intends to continue to rely upon trade
secrets and improvements, unpatented proprietary know-how, and continuing
technological innovation to develop and maintain its competitive position in
research and diagnostic products. To this end, the Company places restrictions
in its agreements with third parties which restrict their right to use and
disclose any of the Company's proprietary technology which they may be involved
with. In addition, the Company has internal non-disclosure safeguards, including
confidentiality agreements with all of its employees. There can be no assurance
that others may not independently develop similar technology or that the
Company's secrecy will not be breached.


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35



MANUFACTURING AND PRODUCTION

The Company uses various common raw materials in the manufacture of its
products and in the development of its technologies. These raw materials are
generally available from several alternate distributors of laboratory chemicals
and supplies. The Company has not experienced any significant difficulty in
obtaining these raw materials and does not consider raw material availability to
be a significant factor in its business. The Company uses purified materials
with strict requirements for sterility and pyrogenicity.

The Company's Oncolym(R) and TNT antibodies are produced for use in the
Phase II/III clinical trials at Techniclone's CGMP pilot facility in Tustin,
California. The Company has acquired additional bioreactors and other equipment
which it believes is adequate to meet current clinical trial requirements for
its Oncolym(R) and TNT products. Centralized product testing and process
controls in this facility permit the Company to maintain uniformity and quality
control of its antibodies while utilizing economies of scale in its
manufacturing processes.

Once the Oncolym(R) and TNT antibodies have passed stringent quality
control and outside testing, the antibodies are shipped to one of two separate
facilities (one radiolabeling facility is located in the U.S. while the other
radiolabeling facility is located in Europe) for radiolabeling, (the process of
attaching the radioactive agent, Iodine-131, to the antibody). From the
radiolabeling facilities, the labeled Oncolym(R) and TNT antibodies are shipped
overnight to the nuclear medicine department of medical centers and hospitals
for use in treating patients the next day.

The Company believes that its current production facilities can meet
the current anticipated antibody production demands for clinical trials of
Oncolym(R) and TNT. If the Company enters into corporate collaboration or
licensing agreements regarding Oncolym(R) or TNT, clinical trial antibody
production demands may increase. With a minor investment of additional capital,
the Company's facilities would be expandable to handle increased clinical trial
production requirements, should corporate collaborations result in additional
clinical trials. The Company, however, expects that it will be required to enter
into supply agreements with contract manufacturing companies for the commercial
antibody quantities required to support the Company's antibody products, if and
when approved for sale. By contracting out commercial production requirements,
the Company hopes to avoid or defer the significant investment in facilities
that would be required to self-manufacture for commercial markets. The Company
believes that adequate antibody production expertise and capacity is
competitively available in the industry from contract manufacturers to fulfill
the Company's expected future antibody needs.

Radiolabeling of the Company's Oncolym(R) and TNT antibodies for
clinical trial usage is currently obtained from two contract labeling entities.
These entities are not currently capable of handling significantly increased
clinical trial labeling production and labeling for the commercial market. The
Company, therefore, is in discussions with several other contract labeling
companies to obtain additional clinical trial labeling availability and to
establish radiolabeling services for future commercial product quantities. There
are a limited number of companies with the capacity and expertise to radiolabel
the Company's products for clinical trials and commercial markets. Additionally,
any commercial radiolabeling supply arrangement will require the investment of
significant funds by the Company in order for a radiolabeling vendor to develop
the expanded facilities necessary to support the Company's products.


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36
MARKETING

The Company intends to sell its products in the United States and
internationally in collaboration with marketing partners. At the present time,
the Company does not have a sales force to market Oncolym(R) or TNT. If and when
the FDA approves Oncolym(R) or TNT, the marketing of Oncolym(R) and TNT will be
contingent upon the Company entering into an agreement with a company with a
sales force or upon the Company recruiting, training and deploying a sales
force. The Company does not possess the resources or experience necessary to
market either Oncolym(R), TNT, or its other product candidates. Other than the
agreement with BTD, the Company has no arrangements for the distribution of its
product candidates, and there can be no assurance that the Company will be able
to enter into any such arrangements in a timely manner or on commercially
favorable terms, if at all. If the Company is successful in obtaining FDA
approval for one of its product candidates, the Company's ability to market the
product will be contingent upon it either licensing or entering into a marketing
agreement with a large company or upon it recruiting, developing, training and
deploying its own sales force. Development of an effective sales force requires
significant financial resources, time, and expertise. There can be no assurance
that the Company will be able obtain the financing necessary or to establish
such a sales force in a timely or cost effective manner, if at all, or that such
a sales force will be capable of generating demand for the Company's product
candidates. The Company is currently discussing additional collaboration
arrangements with corporate partners to develop the capacity to manufacture,
market and sell the Company's products.

The Company has begun Phase II/III testing in multi-center clinical
trials of Oncolym(R) in late stage non-Hodgkin's lymphoma patients. The clinical
trials are being funded by the Company at participating medical centers,
including M.D. Anderson Cancer Center, George Washington University Medical
Center, Iowa City VA Medical Center, Queen's Medical Center-Hawaii, University
of Illinois at Chicago Medical Center and University of Miami Hospital.
Following the completion of the clinical trials, the Company expects to file an
application with the FDA to market Oncolym(R) in the United States.

During March 1998, the Company began enrolling patients in a Phase I
study of its Tumor Necrosis Therapy (TNT) for the treatment of malignant gliomas
(brain cancer). The clinical trials are being funded by the Company and are
currently being held at The Medical University of South Carolina, with
additional clinical sites to be added in the future.

On February 29, 1996, the Company entered into a Distribution Agreement
with Biotechnology Development, Ltd. (BTD), a limited partnership controlled by
a director and a shareholder of the Company. Under the terms of the agreement,
BTD was granted the right to market and distribute LYM products in Europe and
other designated foreign countries in exchange for a nonrefundable fee of
$3,000,000 and the performance of certain duties by BTD as outlined in the
agreement. The agreement also provides that the Company will retain all
manufacturing rights to the LYM Antibodies and will supply the LYM Antibodies to
BTD at preset prices. In conjunction with the agreement, the Company was granted
an option to repurchase the marketing rights to the LYM Antibodies through
August 29, 1998, at its sole discretion. The repurchase price under the option,
if exercised by the Company, would include a cash payment of $4,500,000, the
issuance of stock options for the purchase of 1,000,000 shares of the Company's
common stock at a price of $5.00 per share with a five year term, and royalty
equal to 5% of gross sales LYM products in designated geographic areas.


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37

EMPLOYEES

As of July 1, 1998, the Company employed 34 full-time employees and one
part time employee, which included 5 Ph.D. level persons, 22 technical and
support employees, and 8 administrative employees. The Company believes its
relationships with its employees are good. The Company expects to add additional
employees during the year ending April 30, 1999, to facilitate the expansion of
its clinical trial programs and other corporate operations.



ITEM 2. PROPERTIES

The Company's corporate, development, clinical trials and manufacturing
operations are located in two Company-owned office and laboratory buildings with
aggregate square footage of approximately 47,770 feet. The facilities are
adjacent to one another and are located at 14272 and 14282 Franklin Avenue,
Tustin, California 92780-7017. The Company manufactures its Oncolym(R) and TNT
antibodies at these facilities. The Company makes combined monthly mortgage and
common area maintenance payments of approximately $24,000 for these facilities.
Monthly rental income from tenants is approximately $11,000.

During July 1998, the Company entered into an agreement for the sale
and subsequent leaseback of its facilities, which consists of two buildings
located in Tustin, California. The sale/leaseback transaction is with an
unrelated entity and provides for the leaseback of the Company's facilities for
a ten-year period with two five-year options to renew.

ITEM 3. LEGAL PROCEEDINGS

There are no pending legal proceedings in which the Company is a party.



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

On April 23, 1998, the Company held a Special Meeting of Stockholders
to consider a proposal to approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized common shares from 60,000,000
shares to 120,000,000 shares. The stockholders approved the proposal. The number
of votes for, against, and withheld amounted to 32,932,321, 1,830,610, and
105,096, respectively.

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38



PART II

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

Prior to 1991, the Company was listed on NASDAQ. In 1991 the Company
was delisted because it did not meet the financial standards established by
NASDAQ. Prior to April 1, 1996, Techniclone's common stock was traded
intermittently in the over-the-counter market. Since April 1, 1996,
Techniclone's common stock has been traded on the NASDAQ Small Cap market. The
following table shows the high and low bid and asked prices for Techniclone's
common stock for each quarter in the last two fiscal years. Prices shown
represent quotations by dealers, without retail markup, markdown or commissions
and may not reflect actual transactions.



Bid Asked
Quarter ended: High Low High Low
- -------------- ---- --- ---- ---

April 30, 1996 7.813 5.125 7.938 5.313
July 31, 1996 6.750 3.250 6.813 3.500
October 31, 1996 5.250 3.250 5.438 3.375
January 31, 1997 6.750 3.313 6.875 3.500
April 30, 1997 6.125 4.625 6.250 4.750
July 31, 1997 5.375 3.625 5.625 3.688
October 31, 1997 4.250 2.313 4.438 2.406
January 31, 1998 3.250 0.875 3.313 0.969
April 30, 1998 1.063 0.469 1.094 0.500


As of July 23, 1998, the number of holders of record of the Company's
common stock was 5,813.

The Company has a limited operating history and only nominal revenues
to date. No dividends on common stock have been declared or paid by the Company.
The Company intends to employ all available funds for the development of its
business and, accordingly, does not intend to pay any cash dividends in the
foreseeable future.

SALES OF UNREGISTERED SECURITIES

During July 1997, in conjunction with the purchase of Peregrine, during
April 1997, the Company issued an additional 143,979 common shares in exchange
for $550,000 to an accredited invested and previous stockholder of Peregrine
pursuant to Regulation D.

On October 19, 1997, the Company issued 325,000 shares of Class C
Stock for a late filing penalty to the holders of Class C Stock pursuant to
Regulation D.

On April 23, 1998, through a private placement, the Company sold
1,120,065 shares of restricted common stock for $625,000, including 84,034
shares to an officer of the Company. In conjunction with the private placement,
the Company granted warrants to purchase 280,015 shares of its common stock at
$1.00 per share. The warrants expire in April 2001. The offering was made to
accredited investors only pursuant to Regulation D.

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39

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been extracted from the
consolidated financial statements of the Company for each of the five years in
the period ended April 30, 1998. The consolidated financial statements for each
of the five years in the period ended April 30, 1998, have been audited by the
Company's independent public accountants. These financial summaries should be
read in conjunction with the information contained for each of the three years
in the period ended April 30, 1998, included in the consolidated financial
statements and notes thereto, Management's Discussion and Analysis of Results of
Operations and Financial Condition, and other information provided elsewhere
herein.


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40



SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,



1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------

REVENUES:
Net product sales and royalties $ 4,400 $ -- $ 4,824 $ 26,632 $ 4,300
Licensing fees 56,375 7,265 3,000,000 -- --
Interest and other income 8,591 126 138,499 319,709 530,013
------------ ------------ ------------ ------------ ------------
Total revenues 69,366 7,391 3,143,323 346,341 534,313

COSTS AND EXPENSES:
Cost of sales 1,680 -- 2,580 24,940 4,300
Research and development 1,315,898 1,357,143 1,679,558 2,886,931 7,639,656
General and administrative
Unrelated entities 914,142 547,133 947,816 3,046,873 4,254,820
Affiliates 212,594 137,326 170,659 266,628 163,195
Interest 30,467 27,833 17,412 147,852 296,259
Purchased in-process research and
development -- 4,849,591 -- 27,154,402 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 2,474,781 6,919,026 2,818,025 33,527,626 12,358,230
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (2,405,415) $ (6,911,635) $ 325,298 $(33,181,825) $(11,823,917)
============ ============ ============ ============ ============
Net income (loss) before preferred stock
accretion and dividends $ (2,405,415) $ (6,911,635) $ 325,298 $(33,181,285) $(11,823,917)
Preferred stock accretion and dividends:
Accretion of Class B and Class C
Preferred Stock discount (5,327,495) (2,475,584)
Imputed dividends for Class B
and Class C Preferred Stock (560,467) (544,481) (965,495)
------------ ------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (2,405,415) $ (6,911,635) $ (5,562,664) $(33,725,766) $(15,264,996)
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 13,563,829 15,794,811 18,466,359 21,429,858 30,947,758
============ ============ ============ ============ ============
NET LOSS PER SHARE $ (0.18) $ (0.44) $ (0.30) $ (1.57) $ (0.49)
============ ============ ============ ============ ============



CONSOLIDATED BALANCE SHEET DATA
APRIL 30,

1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------

Working Capital (Deficit) $ (499,059) $ (934,121) $ 7,460,514 $ 10,618,012 $ (2,508,826)

Total Assets $ 848,036 $ 856,657 $ 10,775,757 $ 18,701,470 $ 12,039,190

Long-Term Debt $ 258,500 $ 258,500 $ 987,032 $ 1,970,065 $ 1,925,758

Accumulated Deficit $(11,174,343) $(18,085,978) $(23,648,642) $(57,374,408) $(72,639,404)

Stockholders' Equity (Deficit) $ (60,905) $ (600,441) $ 8,964,677 $ 14,568,009 $ 5,447,746



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

Techniclone Corporation is engaged in the research and development of
new technologies using monoclonal antibodies and the production of specific
antibodies with prospective research, diagnostic and therapeutic applications.
The Company's activities are primarily focused on innovative tumor targeting
systems that permit the destruction or treatment of cancerous tumors. As shown
in the Company's consolidated financial statements, the Company incurred
operating losses during fiscal 1998 and 1997 and has an accumulated deficit at
April 30, 1998.

GOING CONCERN

The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company experienced a loss of
approximately $11,824,000 during the year ended April 30, 1998, had a cash
balance of approximately $1,736,000 and an accumulated deficit of approximately
$72,639,000 at April 30, 1998. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern.

The Company must raise additional funds to sustain research and
development, provide for future clinical trials and continue its operations
until it is able to generate sufficient additional revenue from the sale and/or
licensing of its products. The Company plans to obtain required financing
through one or more methods including, a sale and subsequent leaseback of its
facilities, obtaining additional equity or debt financing and negotiating a
licensing or collaboration agreement with another company. The Company must also
renegotiate the terms under the buyback agreement for the Oncolym(R) European
marketing rights, or obtain additional financing prior to August 29, 1998,
should the Company exercise its purchase option for the Oncolym(R) European
marketing rights. There can be no assurance that the Company will be successful
in raising such funds on terms acceptable to it, or at all, or that sufficient
additional capital will be raised to complete the research, development, and
clinical testing of the Company's product candidates. The Company's future
success is dependent upon raising additional money to provide for the necessary
operations of the Company. If the Company is unable to obtain additional
financing, there would be a material adverse effect on the Company's business,
financial position and results of operations. The Company's continuation as a
going concern is dependent on its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain additional financing as may be
required and, ultimately, to attain successful operations.

During the period from May 1, 1998 through July 17, 1998, the Company
received $530,000 from the exercise of an option to purchase 530 shares of Class
C Stock from the Placement Agent for the related stock offering and
approximately $1,356,000 from the exercise of warrants associated with the Class
C Stock financing in exchange for approximately 2,068,000 shares of the
Company's common stock.

During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line (Equity Line) with two institutional investors,
expiring in June 2001. Under the terms of the Equity Line, the Company may, in
its sole discretion, and subject to certain restrictions, periodically sell
("Put") shares of the Company's common stock for up to $20,000,000 upon the
effective registration of the Put shares. After effective registration for the
Put shares, unless an

41

42



increase is otherwise agreed to, $2,250,000 of Puts can be made every quarter,
subject to share issuance volume limitations identical to those set forth in
Rule 144(e). At the time of each Put, the investors will be issued a warrant,
expiring on December 31, 2004, to purchase up to 10% of the amount of common
stock issued to the investor at the same price at the time of the Put.

The Equity Line provided for immediate funding of $3,500,000 in
exchange for 2,545,454 shares of common stock. One-half of this amount is
subject to adjustment at three months after the effective date of the
registration statement registering these shares with the second half subject to
adjustment six months after such effective date of the registration of these
shares. At each adjustment date, if the market price at the three or six month
period ("Adjustment Price") is less than the initial price paid for the common
stock, the Company will be required to issue additional shares of its common
stock equal to the difference between the amount of shares which would have been
issued if the price had been the Adjustment Price for $1,750,000. The Company
will also be required to issue additional warrants at each three month and six
month period for 10% of any additional shares issued. Future Puts under the
Equity Line will be priced at a 15% discount on the 10 day low closing bid
price.

YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997

The Company incurred a net loss of approximately $11,824,000 for the
fiscal year ended April 30, 1998, as compared to a net loss of approximately
$33,181,000 for the prior fiscal year ended April 30, 1997. The decrease in the
net loss of approximately $21,357,000 is primarily attributable to the net
effect of a one time charge to earnings of $27,154,000 in fiscal year 1997 in
connection with the acquisition of the outstanding capital stock of Peregrine
Pharmaceuticals, Inc. (Peregrine) during that year and an increase of
approximately $4,753,000 in research and development expenses primarily
associated with increased clinical trial activities during fiscal year 1998.

The increase in revenue of $188,000 from $346,000 in fiscal year 1997
to $534,000 in fiscal year 1998 is primarily attributable to an increase in
interest income earned on cash available for investment. During fiscal year
1998, the Company had greater amounts of cash available for investment as a
result of the completion of the Class C Stock financing in April 1997.
Offsetting the increase in revenues was a decrease in product and licensing
revenues in fiscal year 1998 of approximately $22,000. This decrease occurred as
a result of the Company's reacquisition of the Oncolym(R) marketing and
distribution rights in November 1998 from Alpha Therapeutic Corporation (Alpha)
and the resulting discontinuation of the sale to Alpha of Oncolym(R) products
for use in clinical trials. The Company does not expect interest or product
revenues to be significant in the year ending April 30, 1999.

Total costs and expenses decreased approximately $21,169,000 for the
year ended April 30, 1998, in comparison to the year ended April 30, 1997. The
decrease in total costs and expenses is primarily attributable to the net effect
of a one time charge to earnings of $27,154,000 in fiscal year 1997 in
connection with the acquisition of the outstanding capital stock of Peregrine
and increases of $4,753,000 in research and development expenses and $1,105,000
in general and administrative expenses during fiscal year 1998.

Cost of sales decreased approximately $21,000 in comparison to the
prior year coinciding with the discontinuation of sales to Alpha of Oncolym(R)
product for use in clinical trials.



42

43

Research and development expense increased approximately $4,753,000
for the year ended April 30, 1998, in comparison to the year ended April 30,
1997. This increase resulted primarily from the Company's activities during the
year ended April 30, 1998, in preparing and conducting Phase II/III clinical
trials of Oncolym(R) and the Company's activities in preparation for its Phase I
TNT clinical trial for malignant glioma (brain cancer), which began in March
1998. In connection with preparing for and conducting clinical trials, the
Company was required to hire additional personnel, increase production and
radiolabeling capabilities, establish multiple clinical trial sites and augment
its validation and quality control activities to prepare for the upgrade to its
facilities to CGMP standards. Also contributing to the increase in research and
development expenses during fiscal year 1998, were fees of $510,000 incurred in
connection with the repurchase of the Oncolym(R) rights from Alpha and increased
license and legal and patent fees related to the VTA technologies acquired in
conjunction with the acquisition of Peregrine in April 1997. Management believes
that research and development costs will continue to increase as the Oncolym(R)
and TNT clinical trials continue.

General and administrative expenses incurred by the Company increased
approximately $1,105,000 during the year ended April 30, 1998, in comparison to
the prior year ended April 30, 1997. The increase in general and administrative
expenses during the year ended April 30, 1998, resulted primarily from increased
consulting fees associated with the acquisition of Peregrine ($192,000),
additional noncash consideration paid to the Class C Preferred Stockholders
($325,000), a noncash loss on disposal of assets ($161,000), increased payroll
and recruiting costs associated with the hiring of a new Chief Executive Officer
and increased legal, accounting, administrative and filing fees associated with
increased public filings and other public relations activities. The Company
expects that general and administrative expenses will increase in absolute
dollars and decrease as a percentage of total expenses during the next year.

Interest expense increased approximately $148,000 during fiscal year
1998 as compared to fiscal year 1997 due to higher levels of interest bearing
debt outstanding during the 1998 year. The higher level of debt was as a result
of the purchase of a second facility in October 1996 combined with financing of
equipment purchases during fiscal year 1998. Management believes that interest
expense will decrease and that there will be a corresponding increase in general
and administrative expense should the Company complete a sale and leaseback of
its facilities. If the sale and leaseback transaction is not consummated,
interest expense is expected to increase.

YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996

The Company incurred a net loss of approximately $33,181,000 for the
fiscal year ended April 30, 1997, as compared to the net income of approximately
$325,000 for the fiscal year ended April 30, 1996. The change from net income in
1996 to a net loss of approximately $33,181,000 in 1997 is primarily
attributable to a decrease in licensing fee revenue of approximately $3,000,000
and approximately $27,154,000 charged to earnings in connection with the
acquisition of the outstanding capital stock of Peregrine in fiscal year 1997.
The purchase price, including net liabilities assumed, represents the amount
paid for acquired technologies and related intangible assets. The purchase price
of the Peregrine acquisition has been charged to operations, as of the effective
date of the acquisition, as purchased in-process research and development with a
corresponding credit to additional paid-in capital. The purchase price was
charged to operations as Peregrine's technologies have not reached technological
feasibility and the technology had no known future alternative uses other than
the possibility for treating cancer patients.


43


44

The increase in the net loss is also attributable to an increase in
other costs and expenses of approximately $3,555,000 which amount is partially
offset by an increase in revenues, other than licensing fees, of approximately
$203,000. The increase in total costs and expenses is primarily attributable to
increases in activity by the Company associated with the expansion of its
facilities, expansion of clinical trial activities for the Oncolym(R) and TNT
antibody technologies and increases in administrative and operational personnel
in preparation for the scale-up of the manufacturing process for production of
the Oncolym(R) antibodies to be used in the Phase II/III clinical trials. The
Company expects to continue to incur significant expenses during the next fiscal
year as it further expands clinical trials for its Oncolym(R) and TNT antibody
technologies.

Total revenues decreased approximately $2,797,000 from approximately
$3,143,000 in fiscal year 1996 to $346,000 in fiscal year 1997. This decrease
resulted from a reduction in licensing fee revenue of $3,000,000, partially
offset by an increase in interest and other income of approximately $181,000 and
an increase of $22,000 in sales of antibodies and other products in comparison
to the prior year ended April 30, 1996. During fiscal year 1996, the Company
sold certain distribution rights for LYM antibodies to Biotechnology
Development, Ltd. (BTD) in exchange for a nonrefundable fee of $3,000,000
resulting in licensing revenue in fiscal year 1996 and which did not reoccur in
fiscal year 1997. Rental income increased as a result of the Company's purchase
of a second building in October 1996, that is partially leased to tenants.
Interest income increased during the current year due to increases in cash
available for investment from the sale of Class B Convertible Preferred Stock in
December 1995.

Cost of sales increased approximately $22,000 in comparison to the
prior year coinciding with increases in the sale of antibodies and other
products.

Research and development expenses increased approximately $1,207,000
for the year ended April 30, 1997, in comparison to the year ended April 30,
1996. The increase in research and development expenses during the year ended
April 30, 1997, resulted from the Company's activities during the year ended
April 30, 1997 in support of the Phase II/III clinical trials of the Oncolym(R)
antibody being conducted by Alpha and the Company's activities in preparing for
Phase I clinical trials of the TNT antibody. During the year ended April 30,
1997, the Company's research and development costs increased primarily due to
increases in salaries and consulting fees of approximately $654,000 related to
clinical trial support activities and $246,000 for TNT development.

General and administrative expenses incurred by the Company increased
approximately $2,195,000 during the year ended April 30, 1997 in comparison to
the prior year ended April 30, 1996. The increase in general and administrative
expenses during the year ended April 30, 1997, resulted primarily from increased
administrative, payroll and consultant costs to facilitate the Company's
expansion and expanded public relations activities.

Interest expense increased approximately $130,000 during the year ended
April 30, 1997 in comparison to the year ended April 30, 1996 due to higher
levels of interest bearing debt outstanding during the year as a result of the
purchase of the Company's facility in April 1996 and the purchase of the
adjacent facility in October 1996. The outstanding note payable balance on for
both of the facilities amounted to approximately $2,044,000 at April 30, 1998.

44

45

LIQUIDITY AND CAPITAL RESOURCES

During fiscal year 1998, the Company utilized approximately $9,851,000
in cash for operations and expended approximately $4,758,000 primarily for the
expansion and upgrade of its facilities. These expenditures were funded
primarily through the receipt of $11,069,000 in proceeds received in conjunction
with the Class C 5% Adjustable Convertible Class C Preferred Stock (Class C
Stock) financing completed in April 1997, the sale of Class C Stock to the
Placement Agent for proceeds of $670,000, the sale of common stock in private
transactions and the exercise of stock options for proceeds of $1,211,000 and
the issuance of short-term notes payable for $2,385,000.

At April 30, 1998, the Company had approximately $1,736,000 in cash and
cash equivalents and a working capital deficit of approximately $2,509,000. The
Company has experienced negative cash flows from operations since its inception
and expects the negative cash flow from operations to continue for the
foreseeable future. The Company currently has significant liabilities related to
the construction of manufacturing facilities and has commitments to expend
additional funds for facilities construction, clinical trials, radiolabeling
contracts, consulting, and for the repurchase of LYM-1 (Oncolym(R)) marketing
rights from Alpha Therapeutic Corporation (Alpha). The Company also anticipates
the need for significant funds to repurchase the European marketing rights for
Oncolym(R) from Biotechnology Development, Ltd. (BTD) and to scale-up the
manufacturing and radiolabeling capabilities. The Company expects operating
expenditures related to clinical trials to increase in the future as the
Company's clinical trial activity increases and scale-up for clinical trial
production continues. The repurchase of the European marketing rights from BTD
is subject to the Company obtaining additional cash resources or renegotiating
the agreement. As a result of increased activities in connection with the Phase
II/III clinical trials for Oncolym(R) and Phase I clinical trials for Tumor
Necrosis Therapy (TNT), and the development costs associated with Vasopermeation
Enhancement Agents (VEAs) and Vascular Targeting Agents (VTAs), the Company
expects that the monthly negative cash flow will continue.

During the period from May 1, 1998 through July 17, 1998, the Company
received $530,000 from the exercise of an option to purchase 530 shares of Class
C Stock from the Placement Agent for the related stock offering and
approximately $1,356,000 from the exercise of warrants associated with the Class
C Stock financing in exchange for approximately 2,068,000 shares of the
Company's common stock.

In addition, during June 1998, the Company secured access to
$20,000,000 under a Common Stock Equity Line (Equity Line) with two
institutional investors. Under the Equity Line, the Company received immediate
funding of $3,500,000, before cash commissions of $280,000, in exchange for
2,545,454 shares of the Company's common stock. The remainder of the commitment
will be available for use through June 2001, with the decision to sell
additional common stock and the timing of such stock sales being solely at the
Company's discretion, subject to quarterly maximum sales of $2,250,000 and
certain other conditions including registration of the underlying shares common
stock. Future stock issuances under the Equity Line will be priced at a 15%
discount to the fair market value (as defined in the agreement) of the Company's
common stock.


45
46
After considering funds received under the short-term note payable, the
exercise of the Placement Agent option, the exercise of warrants associated with
the Class C financing, the initial proceeds received under the equity line of
credit and outflow of cash for operations, the Company's cash and cash
equivalent position increased to approximately $4,857,000 as of July 17, 1998.

While the Company believes that this cash will meet its short term
operating needs, it will be necessary to raise additional funds to sustain
research and development, provide for future clinical trials and to continue its
operations until it is able to generate sufficient additional revenue from the
sale and/or licensing of its products. The Company will be required to obtain
financing through one or more methods including, a sale and subsequent leaseback
of its facilities, obtaining additional equity or debt financing and negotiating
a licensing or collaboration agreement with another company. The Company must
also renegotiate the terms under the buyback agreement for the Oncolym(R)
European marketing rights, or obtain additional financing prior to August 29,
1998, should the Company exercise its purchase option for the Oncolym(R)
European marketing rights. There can be no assurance that the Company will be
successful in raising such funds on terms acceptable to it, or at all, or that
sufficient additional capital will be raised to complete the research and
development of the Company's product candidates. The Company's future success is
dependent upon raising additional money to provide for the necessary operations
of the Company. If the Company is unable to obtain additional financing, there
would be a material adverse effect on the Company's business, financial position
and results of operations.

On July 17, 1998, the Company notified the holders of the Class C Stock
of its intention to redeem any unexercised warrants on August 6, 1998 that have
been issued in conjunction with the 5% Adjustable Class C Preferred Stock (Class
C Stock) financing. Under the terms of the financing, upon conversion of the
Class C Stock, the holders of the Class C Stock were granted warrants to
purchase one-fourth of the common stock issued upon conversion for $.6554 per
share. The agreement provides that the Company may redeem the warrants for $.01
per share provided that certain conditions are met. Upon notice of redemption of
the warrantholder by the Company, the warrantholder may exercise the warrants
for cash, on a cashless basis or any combination thereof. Assuming a closing bid
price of the Company's common stock of $1.50 per share, if the warrantholders
elect to exercise on a cashless basis, the Company will issue approximately
2,295,000 shares of its common stock. If all of the warrantholders elect to
exercise on a cash basis, the Company will receive approximately $2,672,000 and
will issue 4,076,000 shares of its common stock. Should the closing bid price of
the Company's common stock not remain above $.98 during the period from July 17,
1998 through August 6, 1998, the Company's redemption of the warrants would be
nullified. If the warrant redemption is nullified, the Company would not receive
any proceeds from the warrant redemption and any unexercised warrants could
remain outstanding at the election of the warrantholder.

Also in July 1998, the Company renegotiated its short-term note payable
for $2,385,000 with a construction contractor to provide for immediate payment
by the Company of $500,000 and an extension of time to pay the remaining
balance of approximately $1,885,000 to August 17, 1998. Interest on the
remaining balance is payable under the same terms as the original note. In
connection with the extension agreement, the Company issued an additional
warrant, expiring in July 2001, to purchase up to 95,000 shares of the Company's
common stock at $1.37 per share.

During the same period, the Company entered into an agreement for the
sale and subsequent leaseback of its facilities, which consists of two buildings
located in Tustin, California. The sale/leaseback transaction is with an
unrelated entity and provides for the leaseback of the Company's

46


47

facilities for a ten-year period with two five-year options to renew. Proceeds
from the sale of the Company's facilities are expected to be sufficient to
retire the mortgage notes payable on the facilities as well as the amounts owed
to the contractor for the upgrade and expansion of its antibody production
facilities. As the sale/leaseback agreement is in escrow and subject to
completion of normal due diligence procedures by the buyer, there is no
assurance that the transaction will be completed on a timely basis or at all.
Should the transaction not be completed by August 17, 1998, the Company would be
required to utilize current cash funds to retire the $1,885,000 remaining
balance owed to the contractor and would be required to find another buyer for
the building or obtain alternative sources of financing.

Without obtaining additional financing or completing one or more of the
aforementioned transactions, the Company believes that it has sufficient cash on
hand and available pursuant to the equity-based line of credit mentioned above
to meet its obligations on a timely basis through January 31, 1999.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" which changes the previous standards for computing
earnings per share and requires the disclosure of basic and diluted earnings per
share. During the quarter ended January 31, 1998, the Company adopted SFAS No.
128. Under SFAS No. 128, the Company now discloses basic earnings (loss) per
share and diluted earnings (loss) per share for all periods for which an income
statement is presented. The adoption of this standard had no effect on the basic
or diluted earnings per share for periods in which the Company incurred losses,
and had no effect in basic earnings per share as compared with primary earnings
per share in fiscal year 1996.

During 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which established standards for the
reporting and displaying of comprehensive income. Comprehensive income is
defined as all changes in a Company's net assets except changes resulting from
transactions with shareholders. It differs from net income in that certain items
currently recorded to equity would be a part of comprehensive income.
Comprehensive income must be reported in a financial statement with the
cumulative total presented as a component of equity. This statement will be
adopted by the Company in the quarter ended July 31, 1998.

During 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which will be effective for the Company beginning May 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company believes the segment information required to be disclosed
under SFAS No. 131 may be more comprehensive than previously provided, including
expanded disclosure of income statement and balance sheet items. The Company has
not yet completed its analysis of the operating segments on which it may be
required to report.

During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
will be effective for the Company beginning April 1, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position and measure
those instruments at fair value. The Company

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48

believes the information required to be recorded and disclosed under SFAS No.
133 will not have a significant effect, if any, on the Company's consolidated
statements of position or results of operations.

CAPITAL COMMITMENTS

At April 30, 1998, the Company had commitments for the purchase and
installation of laboratory equipment aggregating $287,000. The funds to fulfill
these commitments will be obtained through available working capital and/or
through capital equipment financing that may be obtained in the future.

IMPACT OF THE YEAR 2000

The Company is continually modifying and upgrading its software and
systems and has modified its current financial software to be Year 2000
compliant. The Company does not believe that with upgrades of existing software
and/or conversion to new software that the Year 2000 issue will pose significant
operational problems for its internal computer systems. The Company expects all
systems to be Year 2000 compliant by April 30, 1999 through the use of internal
and external resources. However, there can be no assurance that the systems of
other companies on which the Company may rely also will be timely converted or
that such failure to convert by another company would not have an adverse effect
on the Company's systems. The Company presently believes the Year 2000 problem
will not pose significant operational problems and is not anticipated to have a
material effect on its financial position or results of operations in any given
year. Actual results could differ materially from the Company's expectations due
to unanticipated technological difficulties or project delays by the Company or
its suppliers.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements included in this Report
at pages F-1 through F-26.



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

Not applicable.


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49

PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except for information concerning the Company's executive officers
which is included in Part I of this Annual Report on Form 10-K, the information
required by Item 10 is incorporated herein by reference from the Company's
definitive proxy statement for the Company's 1998 annual shareholders' meeting.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1998 annual
shareholders' meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement for the Company's 1998 annual
meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the fiscal years ended April 30, 1997 and 1996, the Company
incurred and paid expenses of $62,000 and $89,000, respectively, to Kanady &
Moding C.P.A.'s, an accounting firm in which Mr. William V. Moding, an executive
officer and previous director of the Company, was a partner, for accounting and
consulting services rendered to the Company. On October 1, 1996, Mr. Moding
commenced full-time employment with the Company and Mr. Moding's accounting firm
discontinued rendering services to the Company.

On January 17, 1997, the Company loaned Lon H. Stone, former Chairman
of the Board of Directors and former Chief Executive Officer of the Company,
$350,000 pursuant to a Promissory Note. The highest loan balance during the year
ended April 30, 1998, was $381,464 which included principal and accrued
interest. The purpose of the loan was to provide Mr. Stone with the additional
cash necessary to purchase a new residence. The Board of Directors, including
the Compensation Committee, determined that it was in the best interests of the
Company to loan Mr. Stone the money. After determining that such loan was in the
best interests of the Company, the Board of Directors, with Lon Stone
abstaining, unanimously approved the loan to Lon Stone. The Note is
collateralized by real estate and bears interest at seven percent (7%) per
annum. The original Note and interest thereon is due and payable on January 31,
2000.

In connection with Mr. Stone's termination as Chief Executive Officer
and Chairman of Board during fiscal year 1998, the Board of Director's of the
Company negotiated a new Severance Agreement with Mr. Stone to conserve cash.
Mr. Stone's employment agreement provided that the Company to make an immediate
and substantial cash expenditure on his termination. The Company did not have
sufficient cash resources to fulfill its obligations under Mr. Stone's
employment agreement. Accordingly, at the direction of the Board of Directors,
the Company negotiated a new Severance Agreement with Mr. Stone to conserve the
cash on hand at March 2, 1998.

49
50

The new Severance Agreement provides for Mr. Stone to be paid $300,000 a year
for the period beginning March 1, 1998 through March 1, 2000. Unexercised and
unvested outstanding stock options on March 1, 1998, will vest and be paid as
follows: one-third of the unexercised, unvested options outstanding on March 1,
1998 will vest immediately and be paid to Mr. Stone on December 31, 1998;
one-third of the unexercised, unvested and outstanding options on March 1, 1998,
will vest on March 1, 1999 and be paid on December 31, 1999; and one-third of
the unexercised, unvested and outstanding options on March 1, 1998, will vest
and be paid on March 1, 2000. In addition, the Company will make appropriate
payments, at the bonus rate, to the appropriate taxing authorities. During the
agreement period, beginning on March 1, 1998 and ending on March 1, 2000, Mr.
Stone will, with certain exceptions, be eligible for Company benefits. Pursuant
to the Severance Agreement, Mr. Stone will be available to work for the Company
for a minimum of 25 hours per week. In addition, as part of Mr. Stone's
agreement to modify his existing severance package, the Company agreed that if
Mr. Stone did not compete during the period beginning March 1, 1998 and ending
February 29, 2000, the Company will, on March 1, 2000, pay Mr. Stone an amount
equal to his Note of $350,000, plus all accrued interest thereon to be used by
Mr. Stone to pay off the note receivable.

On April 30, 1997, the Company requested that Mr. Moding exchange
$203,500 of non-interest bearing outstanding notes which Mr. Moding had executed
and delivered to the Company, to pay for options exercised under the Company's
stock option plans. The Company's option plans, which have been approved by
shareholders, provide that a purchaser's promissory note may be used to exercise
options. The original notes were executed and delivered by Mr. Moding in
connection with the exercise of options. At the Company's request, Mr. Moding
agreed to, and did exchange two non-interest bearing notes with maturity dates
at April 30, 1999, for two new notes aggregating $203,500. The notes are secured
by both personal assets of Mr. Moding and 204,000 shares of the common stock of
the Company held by Mr. Moding. The new notes bear interest at six percent (6%)
per annum and are payable in 7 equal annual installments beginning April 30,
1998. On April 29, 1998, the first annual installment of $36,672, including
principal and interest, was made and the remaining principal balance at April
30, 1998, was $179,379.

On April 30, 1997, the Company requested that Mr. Shepard, a previous
director of the Company, exchange $203,083 of non-interest bearing outstanding
notes which Mr. Shepard had executed and delivered to the Company, to pay for
options exercised under the Company's stock option plans. The Company's option
plans, which have been approved by shareholders, provide that a purchaser's
promissory note may be used to exercise options. The original notes were
executed and delivered by Mr. Shepard in connection with the exercise of
options. At the Company's request, Mr. Shepard agreed to, and did exchange two
non-interest bearing notes with maturity dates at April 30, 1999, for two new
notes aggregating $203,083. The notes are secured by both personal assets of Mr.
Shepard and 203,000 shares of the common stock of the Company held by Mr.
Shepard. The new notes bear interest at six percent (6%) per annum and are
payable in 7 equal annual installments beginning April 30, 1998. On April 29,
1998, the first annual installment of $36,596, including principal and interest,
was made and the remaining principal balance at April 30, 1998, was $179,011.

In April 1998, through a private placement, the Company sold 1,120,065
shares of restricted common stock for proceeds of $625,000. Of the restricted
shares issued, 84,034 shares were sold to an officer of the Company. In
conjunction with the private placement, the Company granted warrants to purchase
280,015 shares of its common stock at $1.00 per share, of which, 21,008 warrants
were granted to the same Officer of the Company.
The warrants expire in April 2001.

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51


PART IV

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

(a) (1) Consolidated Financial Statements

The financial statements and schedules listed below are filed
as part of this Report:



Page
----


Independent Auditors' Report F-1

Consolidated Balance Sheets as of F-2
April 30, 1998 and 1997

Consolidated Statements of Operations F-4
for each of the three years in the period
ended April 30, 1998

Consolidated Statements of Stockholders' F-5
Equity (Deficit) for each of the
three years in the period ended
April 30, 1998

Consolidated Statements of Cash Flows F-6
for each of the three years
in the period ended April 30, 1998

Notes to Consolidated Financial Statements F-8

(2) Financial Statement Schedules

II Valuation and Qualifying Accounts F-26




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52



EXHIBIT
NUMBER DESCRIPTION
------ -----------


3.1 Certificate of Incorporation of Techniclone Corporation, a
Delaware corporation (Incorporated by reference to Exhibit B
to the Company's 1996 Proxy Statement as filed with the
Commission on or about August 20, 1996).

3.2 Bylaws of Techniclone Corporation, a Delaware corporation
(Incorporated by reference to Exhibit C to the Company's 1996
Proxy Statement as filed with the Commission on or about
August 20, 1996).

3.3 Certificate of Designation of 5% Adjustable Convertible Class
C Preferred Stock as filed with the Delaware Secretary of
State on April 23, 1997. (Incorporated by reference to Exhibit
3.1 contained in Registrant's Current Report on Form 8-K as
filed with the Commission on or about May 13, 1997.)

4.1 Form of Certificate for Common Stock (Incorporated by
reference to the exhibit of the same number contained in
Registrants' Annual Report on Form 10-K for the year end April
30, 1988)

4.4 Form of Subscription Agreement entered into with Series B
Convertible Preferred Stock Subscribers (Incorporated by
reference to Exhibit 4.1 contained in Registrant's Report on
Form 8-K dated December 27, 1995, as filed with the Commission
on or about January 24, 1996)

4.5 Registration Rights Agreement dated December 27, 1995, by and
among Swartz Investments, Inc. and the holders of the
Registrant's Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 4.2 contained in
Registrant's Current Report on Form 8-K dated December 27,
1995 as filed with the Commission on or about January 24,
1996)

4.6 Warrant to Purchase Common Stock of Registrant issued to
Swartz Investments, Inc. (Incorporated by reference to Exhibit
4.3 contained in Registrant's Current Report on Form 8-K dated
December 27, 1995 as filed with the Commission on or about
January 24, 1996

4.7 5% Preferred Stock Investment Agreement between Registrant and
the Investors (Incorporated by reference to Exhibit 4.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 13, 1997.)

4.8 Registration Rights Agreement between the Registrant and the
Investors (Incorporated by reference to Exhibit 4.2 contained
in Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 13, 1997.)



52

53




4.9 Form of Stock Purchase Warrant to be issued to the holders of
the Class C Preferred Stock upon conversion of the Class C
Preferred Stock (Incorporated by reference to Exhibit 4.3
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 13, 1997.)

4.10 Form of Subscription Agreement entered into with Regulation D
Common Equity Line Subscribers (Incorporated by reference to
Exhibit 4.4 contained in Registrant's Report on Form 8-K dated
as filed with the Commission on or about June 29, 1998)

4.11 Form of Amendment to Regulation D Common Stock Equity Line
Subscription Agreement (incorporated by reference to Exhibit
4.5 contained in Registrant's Current Report on Form 8-K filed
with the Commission on or about June 29, 1998)

4.12 Registration Rights Agreement between the Registrant and the
Subscribers (Incorporated by reference to Exhibit 4.6
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about June 29, 1998.)

4.13 Form of Stock Purchase Warrant to be issued to the of the
Regulation D Common Stock Equity Subscribers (Incorporated by
reference to Exhibit 4.7 contained in Registrant's Current
Report on Form 8-K as filed with the Commission on or about
June 29, 1998.)

10.22 1982 Stock Option Plan (Incorporated by reference to the
exhibit contained in Registrant's Registration Statement on
Form S-8 (File No. 2-85628)

10.23 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1986 (Incorporated by
reference to the exhibit contained in Registrant's
Registration Statement on Form S-8 (File No. 33-15102)

10.24 Cancer Biologics Incorporated Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan -
1987 (Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 (File No.
33-8664)

10.25 Amendment to 1982 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrants' Annual Report on Form 10-K for the
year ended April 30, 1988)

10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrant's Annual Report on Form 10-K for the
year ended April 30, 1988)

10.31 Agreement dated February 5, 1996, between Cambridge Antibody
Technology, Ltd. and Registrant (Incorporated by reference to
Exhibit 10.1 contained in Registrant's Current Report on Form
8-K dated February 5, 1996, as filed with the Commission on or
about February 8, 1996)


53

54




10.32 Distribution Agreement dated February 29, 1996, between
Biotechnology Development, Ltd. and Registrant (Incorporated
by reference to Exhibit 10.1 contained in Registrant's Current
Report on Form 8-K dated February 29, 1996, as filed with the
Commission on or about March 7, 1996)

10.33 Option Agreement dated February 29, 1996, by and between
Biotechnology Development, Ltd. And Registrant (Incorporated
by reference to Exhibit 10.2 contained in Registrant's Current
Report on Form 8-K dated February 29, 1996, as filed with the
Commission on or about March 7, 1996)

10.34 Purchase Agreement for Real Property and Escrow Instructions
dated as of March 22, 1996, by and between TR Koll Tustin Tech
Corp. and Registrant (Incorporated by reference to Exhibit
10.1 contained in Registrant's Current Report on Form 8-K
dated March 25, 1996, as filed with the Commission on or about
April 5, 1996)

10.35 Incentive Stock Option and Nonqualified Stock Option Plan-1993
(Incorporated by reference to the exhibit contained in
Registrants' Registration Statement on Form S-8 (File No.
33-87662)).

10.36 Promissory Note dated October 24, 1996 in the original
principal amount of $1,020,000 payable to Imperial Thrift and
Loan Association by Registrant (Incorporated by reference to
Exhibit 10.1 to Registrants' Current Report on Form 8-K dated
October 25, 1996)

10.37 Deed of Trust dated October 24, 1996 among Registrant and
Imperial Thrift and Loan Association (Incorporated by
reference to Exhibit 10.2 to Registrants' Current Report on
Form 8-K dated October 25, 1996)

10.38 Assignment of Lease and Rents dated October 24, 1996 between
Registrant and Imperial Thrift and Loan Association
(Incorporated by reference to Exhibit 10.3 on Registrants'
Current Report on Form 8-K dated October 25, 1996)

10.39 Commercial Security Agreement dated October 24, 1996 between
Imperial Thrift and Loan Association and Registrant
(Incorporated by reference to Exhibit 10.4 on Registrants'
Current Report on Form 8-K dated October 25, 1996)

10.40 1996 Stock Incentive Plan (Incorporated by reference to the
exhibit contained in Registrants' Registration Statement in
form S-8 (File No. 333-17513)

10.41 Stock Exchange Agreement dated as of January 15, 1997 among
the stockholders of Peregrine Pharmaceuticals, Inc. and
Registrant (Incorporated by reference to Exhibit 2.1 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1997)

10.42 First Amendment to Stock Exchange Agreement among the
Stockholders of Peregrine Pharmaceuticals, Inc. and Registrant
(Incorporated by reference to Exhibit 2.1 contained in
Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 12, 1997



54
55




10.43 Termination and Transfer Agreement dated as of November 14,
1997 by and between Registrant and Alpha Therapeutic
Corporation (Incorporated by reference to Exhibit 10.1
contained in Registrant's Current Report on Form 8-K as filed
with the commission on or about November 24, 1997).

11 Computation of Net Income (Loss) per share 83

21 Subsidiary of Registrant 84

23 Consent of Deloitte & Touche LLP 85

27 Financial Data Schedule 86


(b) Reports on Form 8-K:

None




55
56

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.

TECHNICLONE CORPORATION



Dated: July 28, 1998 By: /s/ Larry O. Bymaster
--------------------------------
Larry O. Bymaster, President

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 Capacity Date
- --------- -------- ----



/s/ Larry O. Bymaster President, Chief Executive
- --------------------------------- Officer and Director (Principal July 28, 1998
Larry O. Bymaster Executive Officer)


/s/ Elizabeth A. Gorbett-Frost Chief Financial Officer July 28, 1998
- --------------------------------- and Secretary
Elizabeth A. Gorbett-Frost (Principal Financial and
Principal Accounting Officer)


/s/ Thomas R. Testman Chairman of the Board July 28, 1998
- --------------------------------
Thomas R. Testman


/s/ Rock Hankin Director July 28, 1998
- --------------------------------
Rock Hankin


/s/ Edward Joseph Legere II Director July 28, 1998
- --------------------------------
Edward Joseph Legere II


/s/ Carmelo J. Santoro, Ph.D. Director July 28, 1998
- --------------------------------
Carmelo J. Santoro, Ph.D.


/s/ Lon H. Stone Director July 28, 1998
- --------------------------------
Lon H. Stone


- -------------------------------- Director July __, 1998
Clive R. Taylor, M.D., Ph.D.




56

57


INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
Techniclone Corporation:



We have audited the accompanying consolidated balance sheets of Techniclone
Corporation and its subsidiary (the Company) as of April 30, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended April
30, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Techniclone Corporation and
subsidiary as of April 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and working
capital deficiency raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
June 15, 1998,
except Note 12, as to which the date is July 17, 1998

F-1
58

TECHNICLONE CORPORATION

CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------



1998 1997
------------ ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,736,391 $ 12,228,660
Other receivables, net 71,112 33,748
Receivable from shareholders (Note 2) 326,700
Inventories, net (Note 2) 45,567 172,162
Prepaid expenses and other current assets 303,790 20,138

Total current assets 2,156,860 12,781,408

PROPERTY (Notes 2, 4 and 12):
Land 1,050,510 1,050,510
Buildings and improvements 6,226,564 3,350,916
Laboratory equipment 2,174,425 1,579,300
Furniture, fixtures and computer equipment 921,068 396,225
Construction-in-progress 524,387
------------ ------------

10,896,954 6,376,951
Less accumulated depreciation and amortization (1,624,505) (1,038,619)
------------ ------------

Property, net 9,272,449 5,338,332

OTHER ASSETS (Note 2):
Patents, net 210,537 178,815
Note receivable from director and shareholder 381,464 356,914
Other 17,880 46,001
------------ ------------

Total other assets 609,881 581,730
------------ ------------

$ 12,039,190 $ 18,701,470
============ ============


See accompanying notes to consolidated financial statements.

F-2
59

TECHNICLONE CORPORATION

CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------



1998 1997
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 728,959 $ 707,504
Notes payable (Notes 4 and 12) 2,503,161 76,527
Accrued legal and accounting fees (Note 10) 583,694 385,500
Accrued license termination fees (Note 6) 350,000 100,000
Accrued royalties and sponsored research (Note 6) 190,160 339,560
Accrued payroll and related costs 141,311 162,487
Reserve for contract losses (Note 2) 248,803
Accrued interest (Note 4) 15,275 72,844
Other current liabilities 153,126 70,171
------------ ------------

Total current liabilities 4,665,686 2,163,396

NOTES PAYABLE (Note 4) 1,925,758 1,970,065

COMMITMENTS (Notes 5, 6 and 12)

STOCKHOLDERS' EQUITY (Notes 2, 3, 4, 6, 7, 8 and 12):
Preferred stock- $.001 par value;
authorized 5,000,000 shares:
Class B convertible preferred stock,
shares outstanding - 1998, none;
1997, 2,200 shares 2
Class C convertible preferred stock,
shares outstanding - 1998, 4,807 shares;
1997, 12,000 shares (liquidation preference of
$4,826,755 at April 30, 1998) 5 12
Common stock-$.001 par value; authorized 120,000,000 share
outstanding 1998 - 48,547,351 shares;
1997 -27,248,652 shares 48,547 27,249
Additional paid-in capital 78,423,433 72,391,736
Accumulated deficit (72,639,404) (57,374,408)
------------ ------------
5,832,581 15,044,591
Less notes receivable from sale of common stock (384,835) (476,582)
------------ ------------

Total stockholders' equity 5,447,746 14,568,009
------------ ------------

$ 12,039,190 $ 18,701,470
============ ============






See accompanying notes to consolidated financial statements.

F-3
60


TECHNICLONE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------



1998 1997 1996
------------ ------------ ------------

REVENUES (Notes 2 and 6):
Net product sales and royalties $ 4,300 $ 26,632 $ 4,824
Licensing fees 3,000,000
Interest and other income 530,013 319,709 138,499
------------ ------------ ------------

Total revenues 534,313 346,341 3,143,323

COSTS AND EXPENSES (Notes 2, 3, 4, 5, 6, 8 and 10):
Cost of sales 4,300 24,940 2,580
Research and development 7,639,656 2,886,931 1,679,558
General and administrative:
Unrelated entities 4,254,820 3,046,873 947,816
Affiliates 163,195 266,628 170,659
Interest 296,259 147,852 17,412
Purchased in-process research and
development 27,154,402
------------ ------------ ------------
Total costs and expenses 12,358,230 33,527,626 2,818,025
------------ ------------ ------------

NET (LOSS) INCOME $(11,823,917) $(33,181,285) $ 325,298
============ ============ ============

Net (loss) income before preferred stock
accretion and dividends $(11,823,917) $(33,181,285) $ 325,298
Preferred stock accretion and dividends:
Accretion of Class B and Class C
Preferred stock discount (2,475,584) (5,327,495)
Imputed dividends for Class B and
Class C preferred stock (965,495) (544,481) (560,467)
------------ ------------ ------------
Net Loss Applicable to Common Stock (Note 2) $(15,264,996) $(33,725,766) $ (5,562,664)
============ ============ ============
Weighted Average Shares Outstanding (Note 2) 30,947,758 21,429,858 18,466,359
============ ============ ============
Net Loss per Share (Note 2) $ (0.49) $ (1.57) $ (0.30)
============ ============ ============


See accompanying notes to consolidated financial statements.

F-4


61
TECHNICLONE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------


PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------

BALANCES, MAY 1, 1995 4,225 $ 4 16,768,909 $ 16,769

Common stock issued for cash 1,770,396 1,770
Class B preferred stock issued for
cash, net of issuance costs of
$1,062,456 8,200 8
Accretion of Class B preferred stock
dividends and discounts
Common stock issued upon conversion of
Class A and Class B preferred stock (5,625) (5) 807,144 807
Common stock issued upon conversion of
note payable and accrued interest
to related party (Note 4) 235,000 235
Common stock issued upon settlement of
liabilities and exchange for
services (Note 4) 240,433 241
Common stock issued upon exercise of
stock options and warrants 226,132 226
Net income
------------ ------------ ------------ ------------
BALANCES, APRIL 30, 1996 6,800 7 20,048,014 20,048

Class C preferred stock issued for
cash, net of issuance costs of
$931,029 (Note 7) 12,000 12
Accretion of Class B and Class C
preferred stock dividends
Common stock issued upon conversion of
Class B preferred stock (4,600) (5) 1,587,138 1,587
Common stock issued for acquisition of
subsidiary (Note 3) 5,080,000 5,080
Common stock issued upon exercise of
stock options 533,500 534
Stock-based compensation (Note 8)
Net loss
------------ ------------ ------------ ------------
BALANCES, APRIL 30, 1997 14,200 14 27,248,652 27,249

Accretion of Class B and Class C
preferred stock dividends and
discount (Note 7) 448 1
Preferred stock issued upon exercise
of Class C Placement Agent Warrant
(Note 7), net of offering costs of
offering costs of $115,193 applicable
to Class C financing 670 1
Additional consideration on Class C
preferred stock (Note 7) 325
Common stock issued upon conversion of
Class B and Class C preferred stock
(Note 7) (10,836) (11) 19,931,282 19,931
Common stock issued for cash and
upon exercise of options
and warrants (Notes 7 & 8) 1,291,794 1,292
Common stock issued for services and
interest 75,623 75
Stock-based compensation (Note 8)
Reduction of notes receivable (Note 7)
Net loss
------------ ------------ ------------ ------------
BALANCES, APRIL 30, 1998 4,807 $ 5 48,547,351 $ 48,547
============ ============ ============ ============




ADDITIONAL NOTES RECEIVABLE NET STOCKHOLDERS'
PAID-IN ACCUMULATED FROM SALE OF EQUITY
CAPITAL DEFICIT COMMON STOCK (DEFICIT)
------------ ------------ ------------ ----------------

BALANCES, MAY 1, 1995 $ 17,945,346 $(18,085,978) $ (476,582) $ (600,441)

Common stock issued for cash 1,287,582 1,289,352
Class B preferred stock issued for
cash, net of issuance costs of
$1,062,456 7,137,536 7,137,544
Accretion of Class B preferred stock
dividends and discounts 5,887,962 (5,887,962)
Common stock issued upon conversion of
Class A and Class B preferred stock (802)
Common stock issued upon conversion of
note payable and accrued interest
to related party (Note 4) 362,962 363,197
Common stock issued upon settlement of
liabilities and exchange for
services (Note 4) 190,859 191,100
Common stock issued upon exercise of
stock options and warrants 258,401 258,627
Net income 325,298 325,298
------------ ------------ ------------ ------------
BALANCES, APRIL 30, 1996 33,069,846 (23,648,642) (476,582) 8,964,677

Class C preferred stock issued for
cash, net of issuance costs of
$931,029 (Note 7) 11,068,959 11,068,971
Accretion of Class B and Class C
preferred stock dividends 544,481 (544,481)
Common stock issued upon conversion of
Class B preferred stock (1,582)
Common stock issued for acquisition of
subsidiary (Note 3) 26,664,920 26,670,000
Common stock issued upon exercise of
stock options 272,366 272,900
Stock-based compensation (Note 8) 772,746 772,746
Net loss (33,181,285) (33,181,285)
------------ ------------ ------------ ------------
BALANCES, APRIL 30, 1997 72,391,736 (57,374,408) (476,582) 14,568,009

Accretion of Class B and Class C
preferred stock dividends and
discount (Note 7) 3,428,605 (3,441,079) (12,473)
Preferred stock issued upon exercise
of Class C Placement Agent Warrant
(Note 7), net of offering costs of
offering costs of $115,193 applicable
to Class C financing 554,806 554,807
Additional consideration on Class C
preferred stock (Note 7) 325,000 325,000
Common stock issued upon conversion of
Class B and Class C preferred stock
(Note 7) (19,920)
Common stock issued for cash and
upon exercise of options
and warrants (Notes 7 & 8) 1,210,117 1,211,409
Common stock issued for services and
interest 94,872 94,947
Stock-based compensation (Note 8) 438,217 438,217
Reduction of notes receivable (Note 7) 91,747 91,747
Net loss (11,823,917) (11,823,917)
------------ ------------ ------------ ------------
BALANCES, APRIL 30, 1998 $ 78,423,433 $(72,639,404) $ (384,835) $ 5,447,746
============ ============ ============ ============



See accompanying notes to consolidated financial statements.

F-5

62

TECHNICLONE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------


1998 1997 1996
------------- ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(11,823,917) $(33,181,285) $ 325,298
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Purchased in-process research and development 27,154,402
Depreciation and amortization 705,973 348,525 169,162
Loss on disposal and write off of long-term assets 200,871
Stock-based compensation expense 438,217 772,746
Common stock issued for services and interest
expense 94,947 70,887
Reserve for contract loss, net of inventory
write-off (155,387)
Additional consideration on Class C preferred stock 325,000
Changes in operating assets and liabilities, net of
effects from acquisition of subsidiaries:
Other receivables, net 289,336 61,398 (92,768)
Inventories, net 33,179 (78,241) 132,536
Prepaid expenses and other current assets (283,652) (2,844) (17,294)
Accounts payable and other accrued liabilities 324,459 561,876 (182,608)
------------ ------------ ------------
Net cash provided by (used in) operating
activities (9,850,974) (4,363,423) 405,213

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenses paid for acquisition of subsidiary, net of
cash acquired (77,189)
Sale (purchase) of short-term investments 3,898,888 (3,898,888)
Property acquisitions (2,873,469) (3,284,281) (2,025,619)
Issuance of note receivable (24,550) (356,914)
Increase in other assets (46,093) (85,016) (42,558)
------------- ------------ ------------
Net cash provided by (used in) investing
activities (2,944,112) 95,488 (5,967,065)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 670,000 11,068,971 7,137,544
Proceeds from issuance of common stock 1,211,409 272,900 1,547,979
Payment of Class C preferred stock offering costs
and fractional share dividends (127,666)
Payments on notes receivable 51,747
Proceeds from issuance of short-term notes payable 500,000
Principal payments on long-term debt (100,754) (44,589)
Proceeds from issuance of long-term debt 98,081 1,020,000 1,020,000
------------ ------------ ------------
Net cash provided by financing activities 2,302,817 12,317,282 9,705,523
------------ ------------ ------------


See accompanying notes to consolidated financial statements.



F-6
63


TECHNICLONE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------



1998 1997 1996
------------ ------------ ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(10,492,269) $ 8,049,347 $ 4,143,671

CASH AND CASH EQUIVALENTS,
Beginning of year 12,228,660 4,179,313 35,642
------------ ------------ ------------

CASH AND CASH EQUIVALENTS,
End of year $ 1,736,391 $ 12,228,660 $ 4,179,313
============ ============ ============

SUPPLEMENTAL INFORMATION:
Acquisition of subsidiary (Note 2):
Fair value of assets acquired $ 27,154,402
Common stock issued (26,670,000)
------------
Net liabilities assumed $ 484,402
============

Interest paid $ 257,959 $ 132,040 $ 3,625
Income taxes paid $ 1,600 $ 800 $ 800




For supplemental information relating to conversion of preferred stock into
common stock, common stock issued in exchange for services, common stock issued
upon merger and other noncash transactions, see Notes 2, 3, 4, 7 and 8.




See accompanying notes to consolidated financial statements.

F-7

64


TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------

1. GENERAL AND NATURE OF OPERATIONS

Nature of Operations - Techniclone Corporation was incorporated in the
state of Delaware on September 25, 1996. On March 24, 1997, Techniclone
International Corporation, a California corporation, (predecessor company
incorporated in June 1981) was merged with and into Techniclone Corporation.
Techniclone Corporation (the Company) is engaged in research and development of
new technologies utilizing monoclonal antibodies and the production of specific
antibodies with prospective research, diagnostic and therapeutic applications.

The Company's activities are primarily focused on innovative drug
delivery systems that permit the destruction or treatment of cancerous tumors.
The Company has two products in clinical trials: LYM-1 (Oncolym(R)), a
non-Hodgkin's B-cell lymphoma therapy product in Phase II/III clinical trials,
and Tumor Necrosis Therapy (TNT), a drug delivery system that has the potential
to destroy large tumors at the necrotic (dead) core without damaging surrounding
healthy tissue in Phase I clinical trials. The Company's product pipeline also
includes the following technologies: Vascular Targeting Agents (VTAs), a drug
delivery system targeting the capillaries and vessels inside a tumor to deliver
a clot-inducing drug, potentially causing the tumor to be "starved" of vital
oxygen and nutrients necessary for its survival; Vasopermeation Enhancement
Agents (VEAs), a technology which targets tumor vessels with vasoactive agents
(molecules that cause tissues to become temporarily permeable) and causes
enhanced levels of drug and isotope uptake within a tumor; and several other
cancer treatment based products.

Going Concern - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, the Company experienced a loss
of approximately $11,824,000 during the year ended April 30, 1998, and had a
cash balance of approximately $1,736,000 and an accumulated deficit of
approximately $72,639,000 at April 30, 1998. The Company must raise additional
funds to sustain research and development, provide for future clinical trials
and continue its operations until it is able to generate sufficient additional
revenue from the sale and/or licensing of its products. The Company plans to
obtain required financing through one or more methods, including a sale and
subsequent leaseback of its facilities, obtaining additional equity or debt
financing and negotiating a licensing or collaboration agreement with another
company. The Company must also renegotiate the terms under the buyback agreement
for the Oncolym(R) European marketing rights, or obtain additional financing
prior to August 29, 1998, should the Company exercise its purchase option for
the Oncolym(R) European marketing rights. There can be no assurance that the
Company will be successful in raising such funds on terms acceptable to it, or
at all, or that sufficient additional capital will be raised to complete the
research and development of the Company's product candidates. The Company's
future success is dependent upon raising additional money to provide for the
necessary operations of the Company. If the Company is unable to obtain
additional financing, there would be a material adverse effect on the Company's
business, financial position and results of operations. The Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing as may be required and, ultimately, to attain successful
operations.

F-8



65

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

Subsequent to April 30, 1998, the Company received funding of
approximately $1,886,000 from the exercise of an option by the Placement Agent
for the Class C Stock and the exercise of warrants issued in conjunction with
the conversion of some of the Class C Stock and obtained access to $20,000,000
under a Common Stock Equity Line (Equity Line). In June 1998, the Company sold
$3,500,000 in common stock under the equity line (Note 12). Without obtaining
additional financing or completing one or more of the aforementioned
transactions, the Company believes that it has sufficient cash on hand and
available pursuant to the equity-based line of credit mentioned above to meet
its obligations on a timely basis through January 31, 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Peregrine Pharmaceuticals, Inc. (Peregrine). All intercompany balances and
transactions have been eliminated.

Cash Equivalents - The Company considers all highly liquid, short-term
investments with an initial maturity of three months or less to be cash
equivalents.

Receivable from Shareholders - Receivable from Shareholders represents
short-term, non-interest bearing amounts due to Peregrine from its prior
shareholders. The amounts were received in May 1997 (Note 3).

Inventories - Inventories are stated at the lower of first-in,
first-out cost or market and consist of the following at April 30:



1998 1997
--------- ---------

Raw materials and supplies $ 45,567 $ 78,746
Finished goods 139,041
Reserves (45,625)
--------- ---------
$ 45,567 $ 172,162
========= =========



The Company estimates reserves on its inventories after considering the
inventory on hand, anticipated usage of the inventory and any sales agreements
for inventory at fixed prices. The inventory reserves at April 30, 1997 were for
quantities in excess of expected future usage and for costs incurred in excess
of the expected sales price for the related inventory. The reserves for excess
quantities are based on a comparison of the quantity of inventory on hand and
the future expected usage of such inventory and have been valued at the lower of
the cost of the inventory or the estimated salvage value of the inventory. Prior
to fiscal year 1998, the reserves for costs incurred in excess of the expected
sales price were based on the difference between total costs incurred for the
inventory and the sales price of the product under the distribution agreement
with Alpha Therapeutic Corporation (Alpha) to supply LYM-1 (Oncolym(R))
antibodies for the Phase II/III clinical trials (Note 6).

F-9
66
\
TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


In November 1997, the Company terminated its agreement with Alpha and reacquired
all of the Alpha rights in Oncolym(R) and LYM-2. As a result of this
transaction, the Company wrote off all of its finished goods inventory of
approximately $241,000.

Property - Property is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related asset. Generally, the estimated useful lives are 8 to 25 years for
buildings and improvements and five to seven years for laboratory equipment and
furniture and fixtures.

Other Assets - Other assets include a note receivable from the former
Chief Executive Officer (CEO) and shareholder of $350,000 plus accrued interest.
The note is collateralized by real estate, bears interest at 7%, and under the
original terms, principal and interest were due on January 31, 2000. In
conjunction with the severance agreement with the Company's former CEO (Note
12), the Company agreed that if the former CEO did not compete with the Company
during the period beginning March 1, 1998 through February 29, 2000, the Company
will, on March 1, 2000, pay the former CEO an amount equal to his principal note
of $350,000 and interest thereon, which would be used to pay off the respective
note. The note receivable approximates fair value, as the rate of interest
earned is consistent with what the Company could earn on similar instruments.
Other assets also include various deposits and patent costs, which are amortized
over the lesser of the estimated useful life of the patent or the estimated
useful life of the related product. Patent costs totaled $210,537 and $178,815,
net of related accumulated amortization of $213,283 and $172,660, at April 30,
1998 and 1997, respectively.

Impairment -The Company assesses recoverability of its long-term assets
by comparing the remaining carrying value to the value of the underlying
collateral or the fair market value of the related long-term asset based on
undiscounted cash flows.

Reserves for Contract Losses - The reserves for contract losses at April
30 1997 represent reserves for losses that were to be incurred under a fixed
sales contract with Alpha to supply LYM-1 (Oncolym(R)) antibodies for the Phase
II/III clinical trials (Note 6). The reserves were based upon the difference
between the sum of the carrying cost of the LYM-1 inventory and the estimated
sales costs less the sales price specified in the Alpha contract. In November
1997, the Company terminated its agreement with Alpha and reacquired all of the
Alpha rights for LYM-1 (Oncolym(R)) and LYM-2. As a result of this transaction,
the Company reversed its accrual for contract losses of $248,803, recorded at
that time.

Authorized Number of Common Shares - In April 1998, the stockholders of
the Company approved an increase in the number of authorized common shares of
the Company from 60,000,000 shares to 120,000,000 shares.

Preferred Stock Dividends - Dividends on Class B and Class C Stock are
accreted over the life of the preferred stock and are based on the stated
dividend rate (10% for the Class B and 5% for the Class C) plus the dividend
amount attributable to the discount at the issuance date. To the extent that
unconverted shares of Class B and Class C Stock remain outstanding, the value of
the dividend is remeasured and recorded on each date that the conversion rate
changes.


F-10
67


TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


Revenue Recognition - Product revenues are recognized upon shipment to
customers. Revenues related to licensing agreements (Note 6) are recognized when
cash has been received and all obligations of the Company have been met, which
is generally upon the transfer of the technology license or other rights to the
licensee. Other income primarily consists of interest and rental income and is
recognized as earned for interest and on a straight-line basis over the rental
period for rent.

Net Income (Loss) Attributable to Common Stockholders - Net income
(loss) per share attributable to common stockholders is calculated by taking the
net income (loss) for the year and deducting the dividends and Preferred Stock
issuance discount accretion on the Class B Preferred Stock and the Class C Stock
during the year and dividing the sum of these amounts by the average number of
shares of common stock outstanding during the year. Shares issuable upon the
exercise of common stock warrants and options and conversions of outstanding
Preferred Stock and Preferred Stock dividends have been excluded from the three
years ended April 30, 1998 per share calculation because their effect is
antidilutive. Accretion of the Class B and Class C Stock dividends and issue
discount amounted to $3,441,079, $544,481, and $5,887,962 for the fiscal years
ended April 30, 1998, 1997 and 1996, respectively (Note 7).

Income Taxes - The Company accounts for income taxes in accordance with
the standards specified in Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of
deferred tax liabilities and assets for the future consequences of events that
have been recognized in the Company's financial statements or tax returns. In
the event the future consequences of differences between financial reporting
bases and tax bases of the Company's assets and liabilities result in a deferred
tax asset, SFAS No. 109 requires an evaluation of the probability of being able
to realize the future benefits indicated by such asset. A valuation allowance is
provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.

Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from these
estimates.

Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the fiscal year 1998 presentation.

New Accounting Standards - In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share" which changes the
previous standards for computing earnings per share and requires the disclosure
of basic and diluted earnings per share. During the quarter ended January 31,
1998, the Company adopted SFAS No. 128. Under SFAS No. 128, the Company
discloses basic earnings (loss) per share and diluted earnings (loss) per share
for all periods for which an income statement is presented. The adoption of this
standard had no effect on the basic or diluted earnings per share for periods in
which the Company incurred losses, and had no effect in basic earnings per share
as compared with primary earnings per share in fiscal year 1996.

F-11
68

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


During 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which established standards for the
reporting and displaying of comprehensive income. Comprehensive income is
defined as all changes in a Company's net assets except changes resulting from
transactions with shareholders. It differs from net income in that certain items
currently recorded to equity would be a part of comprehensive income.
Comprehensive income must be reported in a financial statement with the
cumulative total presented as a component of equity. This statement will be
adopted by the Company in the quarter ended July 31, 1998.

During 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which will be effective for the Company beginning May 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company believes the segment information required to be disclosed
under SFAS No. 131 will be more comprehensive than previously provided,
including expanded disclosure of income statement and balance sheet items. The
Company has not yet completed its analysis of the operating segments on which it
may be required to report.

During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
will be effective for the Company beginning April 1, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position and measure
those instruments at fair value. The Company believes the information required
to be recorded and disclosed under SFAS No. 133 will not have a significant
effect, if any, on the Company's consolidated statements of position or results
of operations.


3. ACQUISITION OF SUBSIDIARIES

Effective April 24, 1997, the Company acquired all of the outstanding
stock of Peregrine in exchange for 5,080,000 shares of the Company's common
stock and the assumption of net liabilities of approximately $484,000. Peregrine
was a development stage company involved in the research and development of
vascular targeting agents. The acquisition was accounted for as a purchase. The
excess of the purchase price over net tangible assets acquired (cash and notes
receivable) and liabilities assumed (accounts payable and accrued liabilities)
represents the difference between the fair value of the Company's common stock
exchanged and the fair value of net assets purchased. The excess purchase price
of $27,154,402 over the net tangible assets acquired represents the amount paid
for acquired technologies and related intangible assets. The excess purchase
price for the acquisition had been charged to operations as of the effective
date of the acquisition as the related technologies have not reached
technological feasibility and the technology had no known future alternative
uses other than the possibility for treating cancer patients.

F-12

69

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

Had the acquisition of Peregrine occurred on May 1, 1995, pro forma net
loss and loss per common share would have been as follows (unaudited):


Pro forma Pro forma net loss
net loss per common share
------------- ------------------

Fiscal year 1996 $(33,985,500) $(1.44)
Fiscal year 1997 $ (7,973,100) $ (.30)


Revenues for fiscal years 1996 and 1997 would not have changed had the
acquisition occurred on May 1, 1995.

4. NOTES PAYABLE

During fiscal year 1998, in conjunction with upgrading the Company's
manufacturing facilities, the Company issued a short-term note payable to a
construction contractor for $2,385,000. The note payable was issued in exchange
for $1,885,000 of accounts payable due to the contractor and cash proceeds of
$500,000 for working capital. Under the terms of the short-term note agreement,
borrowings bear interest at a bank's prime rate plus 5% (13% at April 30, 1998),
payable in common stock of the Company, are collateralized by the Company's
facilities and were due on June 30, 1998. In conjunction with the financing, the
Company issued a warrant, expiring in March 2001, to purchase 240,000 shares of
the Company's common stock at $.5625 per share (Note 8). The value of the
warrants was based on a Black-Scholes formula after considering terms in the
related warrant agreements. In July 1998, the Company renegotiated the payment
terms on this note (Note 12).

In April 1996 and October 1996, the Company entered into two separate
note agreements for $1,020,000 each to finance the purchase of two buildings
used as its operating and administrative facilities. The notes payable are
collateralized by substantially all of the assets of the Company, bear interest
at LIBOR plus 4.25% (9.5% at April 30, 1998) with a minimum rate of 9.5% and a
maximum rate of 14.5%, and mature in April and November 2011, respectively.
Principal and interest payments of $21,470 are due monthly.

During fiscal year 1996, long-term debt to a related party and accrued
interest of $258,500 and $104,697, respectively, were converted into 235,000
shares of common stock at the election of the related party pursuant to the
terms of the convertible note dated December 31, 1991. Interest expense related
to this convertible debt amounted to $13,787 for the year ended April 30, 1996.
Additionally, during fiscal year 1996, accrued expenses and other current
liabilities of $134,000 were converted into 183,333 shares of common stock. No
gain or loss was recorded on the transaction.

In addition, the Company has entered various note agreements to finance
laboratory equipment that bear interest at rates between 10% and 10.9% and
require aggregate monthly payments of $4,403 through June 2002.


F-13
70


TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


Minimum principal payments on the Company's notes payable as of April
30, 1998 are as follows: Year ending April 30:




1999 $2,503,161
2000 106,753
2001 113,209
2002 122,528
2003 112,208
Thereafter 1,471,060
----------
$4,428,919
==========


The Company's stated amounts of its long-term debt approximate its fair
value as the debt is financed at the borrowing rates currently available to the
Company.



5. COMMITMENTS

The Company has various employment agreements with certain officers of
the Company providing for payments as defined in the agreements. Some of the
employment agreements provide for additional compensation payable upon
termination of the officer. Some of the employment agreements continue in effect
unless notification of termination is made. Upon notification of termination,
the agreements expire over periods ranging from 12 to 23 months. At April 30,
1998, future fixed commitments under these agreements amounted to approximately
$633,000 and $431,000 for the fiscal years ended April 30, 1999 and 2000,
respectively.

Subsequent to April 30, 1998, the Company negotiated a Severance
Agreement, expiring in March 2000, with its former Chief Executive Officer (Note
12).

The Company also has an agreement with a consultant that provides for
the granting of options to purchase 75,000 shares of the Company's common stock
at $4.00 per share upon attainment of specified performance criteria. The
performance criteria was not met as of April 30, 1998. The Company also has
agreements with various consultants that provide for cash payments and stock
options to purchase the Company's common stock (Note 8).

At April 30, 1998, the Company had commitments for the purchase of and
installation of laboratory equipment aggregating approximately $287,000.

In fiscal year 1996, the Company purchased its primary facilities (Note
4). Prior to such time, the Company leased the facilities from an unrelated
entity and incurred rent expense of approximately $180,000 in fiscal year 1996,
related to the lease of the facilities. The Company leases a portion of its
facility to two unrelated entities. Rental income for the fiscal years ended
April 30, 1997 and 1998 amount to approximately $89,000 and $141,000,
respectively. Subsequent to April 30, 1998, the Company entered into an
agreement for the sale and subsequent leaseback of these facilities with another
unrelated entity (Note 12).

F-14

71


TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

6. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS

In 1985, the Company entered into a research and development agreement
with Northwestern University and its researchers to develop antibodies known as
LYM-1 (Oncolym(R)) and LYM-2 (collectively "the LYM Antibodies"). The Company
holds an exclusive world-wide license to manufacture and market products using
the LYM Antibodies. In exchange for the world-wide license to manufacture and
market the products, the Company will pay royalties to Northwestern University
of up to 6% of net sales (as defined in the agreement) of the LYM-1 or LYM-2
products.

On October 28, 1992, the Company entered into an agreement with an
unrelated corporation (licensee) to terminate a previous license agreement
relating to the LYM Antibodies. The termination agreement provides for maximum
payments of $1,100,000 to be paid by the Company based on achievement of certain
milestones, including royalties on net sales. At April 30, 1998, the Company had
paid $100,000 and accrued for another $100,000 relating to the termination
agreement. There have been no sales of the related products through April 30,
1998. Future maximum commitments under the agreement are $900,000.

During February 1996, the Company entered into a Distribution Agreement
(the Agreement) with Biotechnology Development, Ltd. (BTD), a limited
partnership controlled by a director and a shareholder of the Company. Under the
terms of the agreement, BTD was granted the right to market and distribute LYM
products in Europe and other designated foreign countries in exchange for a
non-refundable fee of $3,000,000 and the performance of certain duties by BTD as
outlined in the agreement. The Company recognized the license fee as revenue
during the year ended April 30, 1996, as the Company had no further obligations
under the Agreement that it was required to fulfill. The agreement also provides
that the Company will retain all manufacturing rights to the LYM Antibodies and
will supply the LYM Antibodies to BTD at preset prices. In conjunction with the
agreement, the Company was granted an option to repurchase the marketing rights
to the LYM Antibodies through August 29, 1998, at its sole discretion. The
repurchase price under the option, if exercised by the Company, would include a
cash payment of $4,500,000, the issuance of stock options for the purchase of
1,000,000 shares of the Company's common stock at a price of $5.00 per share
with a five year term, and royalty equal to 5% of gross sales LYM products in
designated geographic areas.

Also in February 1996, the Company entered into a joint venture
agreement with Cambridge Antibody Technology, Inc. (CAT), an unrelated entity,
which provides for the co-sponsorship of development and clinical testing of
chimeric and human TNT antibodies. As part of the joint venture agreement, CAT
maintained the responsibility to construct human TNT antibodies for future joint
clinical development and testing. A human TNT antibody was completed by CAT in
early 1998. The agreement also provided that equity in the joint venture and
costs associated with the development of TNT-based products would be shared
equally and the Company will retain exclusive world-wide manufacturing rights.
In May 1998, the Company and CAT elected to discontinue the co-sponsorship of
the development of the TNT antibodies and the Company assumed full
responsibility to fund development and clinical trials of the TNT antibody. As a
result of the modification in the joint venture agreement, royalties on future
sales of products which use the TNT antibody have been decreased to be no more
than 12.5%. The Company and CAT are currently in negotiations regarding
modifications to the joint venture arrangement.


F-15
72

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------



In April 1997, in conjunction with the acquisition of Peregrine, the
Company gained access to certain exclusive licenses for Vascular Targeting
Agents (VTAs) technologies. In connection with obtaining these rights, the
Company will be required to pay an aggregate of $787,500 upon attainment of
defined milestones, $300,000 upon commercial introduction of second and each
succeeding product encompassing the related technology and royalties ranging
from 2% to 4% of net sales of the related products.

In November 1997, the Company entered into a Termination and Transfer
Agreement (the Termination Agreement) with Alpha Therapeutic Corporation
(Alpha), whereby the Company reacquired the rights for the development,
commercialization and marketing of the LYM Antibodies in the United States and
certain other countries, previously granted to Alpha in October 1992. Under the
terms of the Termination Agreement, the Company paid Alpha $260,000 upon signing
of the agreement, and is required to pay Alpha: (i) $250,000 upon enrollment of
the first clinical trial patient by the Company, (ii) $1,000,000 upon filing of
a BLA and (iii) $1,000,000 upon FDA approval of a BLA by the Food and Drug
Administration, and (iv) royalties equal to 2% of net sales for product sold in
North, South and Central America and Asia for five (5) years after
commercialization of the product. Under the Termination Agreement, $510,000 was
expensed in fiscal year 1998, of which, $250,000 was due and payable at April
30, 1998.

Prior to fiscal year 1996, the Company has entered into several license
and research and development agreements with a university for the exclusive,
worldwide licensing rights to use certain patents and technologies in exchange
for fixed and contingent payments and royalties ranging from 2% to 6% of net
sales of the related products. Certain of these agreements also provide for
reduced royalty payments if the technology is sublicensed or if products
incorporate both the licensed technology and another technology. Some of the
agreements are terminable at the discretion of the Company while others continue
through 2001. Minimum royalties under these agreements are $86,500 annually.
Royalties related to these agreements amounted to $86,500 for each of the three
years ended April 30, 1998.

The Company has arrangements with certain third parties to acquire
licenses needed to produce and commercialize chimeric and human antibodies,
including the Company's TNT antibody. The terms of the licenses will not
significantly impact the cost structure or marketability of chimeric or human
TNT-based products.

F-16
73

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


7. STOCKHOLDERS' EQUITY

The Company has issued three classes of preferred stock, Class A, Class
B and Class C. The Class B and Class C preferred stock is nonvoting, has
preferences in liquidation, provides for antidilution protection and is
convertible into common stock. A summary of the preferred stock is as follows:




Number of Per
Class Issuance Date Shares Issued Share Cost Dividend Rate
----- ------------- ------------- ---------- -------------


Class A March 1992 10,000 $ 60 None
Class B December 1995 8,200 $1,000 10%
Class C April 1997 12,000 $1,000 5%


During fiscal year 1996, 4,225 shares of Class A preferred stock were
converted into 338,000 shares of common stock with the commencement of the Phase
II/III clinical trials for the Company's Oncolym(R) product. At April 30, 1996,
there were no remaining Class A preferred shares outstanding.

During December 1995, the Company issued 8,200 shares of Class B
preferred stock (Class B Stock), at a price of $1,000 per share, for net
proceeds of $7,137,544. The number of shares of common stock issued upon
conversion of each share of Class B Stock is determined by (i) taking ten
percent (10%) of One Thousand Dollars ($1,000) pro-rated on the basis of a 365
day year, by the number of days the Class B Stock is outstanding plus (ii) One
Thousand Dollars ($1,000), (iii) divided by the lower of $3.06875, the fixed
conversion price, or 85% of the average closing bid price for the Company's
common stock for the five trading days immediately preceding the conversion date
(the "Conversion Price"). During fiscal years 1996, 1997 and 1998, 1,400, 4,600
and 2,200 shares of Class B Stock were converted into 469,144, 1,587,138 and
4,388,982 common shares, respectively. The Company recorded $1,096,730,
$536,263, and $223,778 in Class B Stock dividends during the fiscal years ended
April 30, 1996, 1997, and 1998, respectively. At April 30, 1998, there were no
remaining shares of Class B Stock outstanding.

On April 25, 1997, the Company entered into a 5% Preferred Stock
Investment Agreement (the Agreement) and sold 12,000 shares of 5% Adjustable
Convertible Class C Preferred Stock (the Class C Stock) for net proceeds of
$11,068,971. The holders of the Class C Stock do not have voting rights, except
as provided under Delaware law, and the Class C Stock is convertible into common
stock.

Commencing on September 26, 1997, the Class C Stock was convertible at
the option of the holder into a number of shares of common stock of the Company
determined by dividing $1,000 plus all accrued but unpaid dividends by the
Conversion Price. The Conversion Price is the lower of $.5958 (Conversion Cap)
per share or the average of the lowest trading price of the Company's common
stock for the five consecutive trading days ending with the trading day prior to
the conversion date reduced by an increasing percentage discount. The discount
ranged from 13% beginning on November 26, 1997 and reaches a maximum discount
percentage of 27% on July 26, 1998. During fiscal year 1998, 8,636 shares of
Class C Stock were converted into 15,542,300 common shares. Subsequent to April
30, 1998 and through June 15, 1998 (report date), the holders of the Class C
Stock converted 4,930 shares of Class C Stock for 8,946,187 shares of common
stock at an average price of $.55 per share and received warrants to purchase an
additional 2,236,535 shares of the Company's common stock at $.6554 per share.

F-17

74


TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


In conjunction with the Agreement, the Placement Agent was granted a
warrant to purchase up to 1,200 shares of Class C Stock at $1,000 per share.
During fiscal year 1998, the Placement Agent purchased 670 shares of Class C
Stock for proceeds of $670,000 provided for under this warrant agreement.
Subsequent to April 30, 1998, the Placement Agent purchased the remaining 530
shares of Class C Stock as provided for in the warrant.

In accordance with the Agreement, upon conversion of the Class C Stock
into common stock, the preferred stockholders were granted warrants to purchase
one-fourth of the number of shares of common stock issued upon conversion. The
warrants are exercisable at $0.6554, or 110% of the Conversion Cap and expire in
April 2002. During fiscal year 1998, warrants to purchase 3,885,515 shares were
issued upon conversion of 8,636 shares of Class C Stock. No warrants were
exercised during the fiscal year ended April 30, 1998. No value has been
ascribed to these warrants, as the warrants are considered non-detachable. Under
the terms of the warrant agreement, the Company has the right to redeem the
warrants for $.01 per share, provided that the Company's closing bid price
exceeds amounts specified in the agreement for specified periods. In July 1998,
the Company notified its Class C Stock warrantholders of its intention to redeem
the warrants (Note 12).

Beginning September 30,1997, the dividends on the Class C Stock are
payable quarterly in shares of Class C Stock or, at the option of the Company,
in cash, at the rate of $50.00 per share per annum. During fiscal year 1998, the
Company recorded $741,720 in Class C Stock dividends, issued 448 Class C Stock
dividend shares, and paid cash dividends of $12,473 for fractional shares
thereon.

The Class C Stock is subject to mandatory redemption upon certain
events as defined in the Class C Stock agreement. Some of the mandatory
redemption features are within the control of the Company. For those mandatory
redemption features that are not within the control of the Company, the Company
has the option to redeem the Class C Stock in cash or common stock. Should a
redemption event occur, it is management of the Company's intention to redeem
the Class C Stock through the issuance of the Company's common stock. During
fiscal year 1998, the Registration Statement required to be filed by the Company
pursuant to the agreement was not declared effective by the 180th day following
the Closing Date, and therefore, the Company issued an additional 325 shares of
Class C Stock, calculated in accordance with the terms of the agreement.

Both the Class B Stock and the Class C Stock agreements include
provisions for conversion of the preferred stock into common stock at a discount
during the term of the agreements. As a result of these conversion features, the
Company is accreting an amount from accumulated deficit to additional paid-in
capital equal to the Preferred Stock discount. The Preferred Stock discount was
computed by taking the difference between the fair value of the Company's common
stock on the date the Preferred Stock agreements were finalized and the
conversion price (assuming the maximum discount allowable under the terms of the
agreement) multiplied by the number of common shares into which the preferred
stock would have been convertible into (assuming the maximum discount
allowable). The Preferred Stock discount is being amortized over the period from
the date of issuance of the Preferred Stock to the Conversion or discount period
(three months for the Class B and sixteen months for the Class C) using the
effective interest method. If preferred stock conversions occur before the
maximum discount is available, the discount amount is adjusted to reflect the
actual discount. During fiscal year 1996, the Company recorded the total Class B
Stock discount of $5,327,495.

F-18

75

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------



No significant discount was recorded in fiscal year 1997. During fiscal year
1998, the Company recorded $2,475,584 for the Class C Stock discount. If the
remaining 4,807 shares of Class C Stock are converted when the maximum 27%
discount is available, the remaining discount to be amortized would be
approximately $825,000 in fiscal year 1999.

In April 1998, through a private placement, the Company sold 1,120,065
shares of restricted common stock for proceeds of $625,000. Of the restricted
shares issued, 84,034 shares were sold to an Officer of the Company. In
conjunction with the private placement, the Company granted warrants to purchase
280,015 shares of its common stock at $1.00 per share. The warrants expire in
April 2001.

During fiscal year 1998, the Company issued 65,000 shares of its common
stock as payment of interest on a short-term note payable (Note 4). In addition,
the Company issued 10,623 shares of its common stock to an unrelated entity in
exchange for services rendered. The issuance of these shares was recorded based
on the more readily determinable value of the services received or the fair
value of the common stock issued.

In April 1997, the Company issued 5,080,000 shares of its common stock
for the purchase of Peregrine (Note 3). In conjunction with the purchase of
Peregrine, during May 1997, the Company issued an additional 143,979 common
shares in exchange for $550,000 to a previous stockholder of Peregrine.

In fiscal year 1996, the Company issued 55,833 common shares for
$83,750 to a director of the Company and to an entity affiliated with the
director.

Notes receivable from the sale of common stock at April 30, 1998, are
due from an officer and other non-affiliates of the Company. The notes bear
interest at 6% per annum, are collateralized by personal assets of the holders
and are due in equal annual installments through April 2004. During April 1998,
an employee and member of the Company's Scientific Advisory Board exchanged a
note receivable of $40,000 for consulting services to the Company for full
payment of the loan. Payments on all other notes have been made in accordance
with the terms of the note agreements.

In accordance with the Company's preferred stock agreements, option
plans and other commitments to issue common stock, the Company has reserved
approximately 28,976,000 shares of the Company's common stock at April 30, 1998
for future issuance.

8. STOCK OPTIONS AND WARRANTS

The Company has five stock incentive plans. The plans were adopted or
assumed in conjunction with a merger in December 1982 (1982 Plan), January 1986
(1986 Plan), June 1994 (1993 Plan), April 1995 (CBI Plan) and September 1996
(1996 Plan). The plans provide for the granting of options to purchase shares of
the Company's common stock at prices not less than the fair market value of the
stock at the date of grant and generally expire ten years after the date of
grant.

The 1996 Plan originally provided for the issuance of options to
purchase up to 4,000,000 shares of the Company's common stock. The number of
shares for which options may be granted under the 1996 Plan automatically
increases for all subsequent common stock issuances by the Company in an amount
equal to 20% of such subsequent issuances as long as the total shares allocated
to the 1996 Plan do not exceed 20% of the Company's authorized stock. As a
result of issuances of common stock by the

F-19
76

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


Company subsequent to the adoption of the 1996 Plan, the number of shares for
which options may be granted, net of options granted, has increased to 6,584,036
at April 30, 1998. There are no remaining shares available for grant under the
1982, 1986 or CBI Plans. At April 30, 1998, 69,795 shares were available for
grant under the 1993 Plan.

Option activity for each of the three years ended April 30, 1998 is as
follows:



1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- --------- -------------- --------- --------------

BALANCE, Beginning of year 4,058,250 $3.02 2,237,750 $0.66 1,961,000 $0.59

Granted 796,909 $1.21 2,419,000 $4.63 588,982 $1.10

Exercised (17,750) $1.00 (533,500) $0.51 (283,232) $0.97

Canceled (360,083) $3.45 (65,000) $2.31 (29,000) $1.75
---------- ---------- ---------
BALANCE, End of year 4,477,326 $0.70 4,058,250 $3.02 2,237,750 $0.66
========= ========= ==========



The Company also has an option agreement with an unrelated entity that
provides for the purchase of 100,000 shares at $3.00 per share, of which, 25,000
options became exercisable and 75,000 options were canceled in fiscal year 1998.
The option expires in March 1999.

Additional information regarding options outstanding as of April 30,
1998 is as follows:





OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------------------
WEIGHTED AVERAGE
RANGE OF PER SHARE REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES NUMBER OF SHARES CONTRACTUAL LIFE PER SHARE SHARES PER SHARE
OUTSTANDING (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------- -------------------- -------------------- -------------------- ----------------- -------------------

$ 0.27 - $ 0.60 4,295,659 7.10 $ 0.56 2,329,771 $ 0.53
$ 4.00 181,667 8.59 $ 4.00 151,667 $ 4.00
----------------- ---------------
$ 0.27 - $ 4.00 4,477,326 7.16 $ 0.70 2,481,438 $ 0.74
================= ===============


At April 30, 1998, options to purchase 4,477,326 shares of the
Company's common stock were outstanding, of which 2,481,438 shares were
exercisable. Options to purchase 6,653,831 shares were available for grant under
the Company's option plans.

During fiscal years 1996, 1997 and 1998, the Company granted stock
options to employees and various consultants. In addition, during fiscal year
1998, the Company experienced a decline in the market value of its common stock
and repriced certain options to key employees, directors and consultants to $.60
per share. The repricing was considered necessary to retain key employees,
directors and consultants to the Company.

Compensation expense recorded in fiscal years 1997 and 1998 primarily
relates to stock option grants made to consultants and has been measured
utilizing the Black-Scholes option valuation model. Total compensation expense
related to stock option grants made to nonemployees or directors of the Company
during fiscal year 1997 and 1998 amounted to $508,000 and $263,000,
respectively, and is

F-20

77

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

being amortized through August 2001, the period of service. Stock option grants
to nonemployees were not significant during fiscal year 1996.

The Company utilizes the guidelines in Accounting Principles Board
Opinion No. 25 for measurement of stock based transactions for employees. Had
the Company utilized a fair value model for measurement of stock based
transactions for employees and amortized the expense over the vesting period,
pro forma information would be as follows:




1998 1997 1996
------------ ------------ -------------

Pro forma net loss $(17,466,000) $(35,606,000) $ (5,909,000)
Pro forma net loss per share $ (0.56) $ (1.66) $ (0.32)



The fair value of the options granted in fiscal years 1996, 1997 and
1998 were estimated at the date of grant using the Black-Scholes option pricing
model, assuming an average expected life of approximately four years, a
risk-free interest rate of 6.39% and a volatility factor ranging from 89% to
92%. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected stock volatility. Because the
Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair values estimated, in the opinion of management, the
existing models do not necessarily provide a reliable measure of the fair value
of its options. The weighted average estimated fair value in excess of the grant
price for employee stock options granted during fiscal years 1998, 1997 and 1996
was $2.27, $3.48 and $2.81, respectively.

As of April 30, 1998, warrants to purchase an aggregate of 1,387,325
shares of the Company common stock were outstanding, all of which were
exercisable at prices ranging between $.56 and $3.00 per share (excluding the
warrants granted to the Class C Stockholders). During fiscal year 1998,
excluding the warrants granted to the Class C Stockholders (Note 7), the Company
granted warrants to purchase 1,020,015 shares of the Company's common stock at
prices ranging between $0.56 and $1.00 per share in conjunction with various
financing arrangements. Of the 1,020,015 shares provided for purchase under the
warrants granted in fiscal year 1998, 280,015 related to a private placement
(Note 7), 240,000 related to the extension of payment terms on a payable to a
contractor and working capital line (Note 4) and 500,000 related to the
extension of a line of credit commitment with BTD. The line of credit commitment
with BTD provided for borrowings of up to $2,000,000 under a line of credit that
expired on May 31, 1998. In exchange for providing this commitment, even though
the Company did not borrow under this arrangement, BTD received a warrant,
expiring in March 2003, to purchase 500,000 shares of the Company's common stock
at $1.00 per share. The value of the above warrants were treated as a cost of
the offering or as interest expense, as applicable, in the accompanying
consolidated financial statements.

During the year ended April 30, 1996, the Company granted warrants to
purchase 40,000 restricted shares of common stock at prices ranging between
$3.00 and $5.30 per share to consultants for services to be provided. The value
assigned to these warrants was not significant and has been amortized over the
period of service.

F-21

78

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

During fiscal year 1998, 20,000 warrants expired and 10,000 warrants
were exercised. The warrants expire at various dates through fiscal year 2003.

In conjunction with the Class C Stock financing, the Company issued the
preferred shareholders warrants to purchase common shares at $.6554 per share
and a warrant to the Placement Agent for the purchase of 1,200 shares of Class C
Stock (Note 7). The Company estimated the difference between the grant price and
the fair value of the placement agent warrants on the date of grant to be
approximately $862,000 and has been treated as a cost of the offering in the
accompanying consolidated financial statements. The value of the warrants was
based on a Black Scholes formula after considering terms in the related warrant
agreements.


9. INCOME TAXES

The provision for income taxes consists of the following:



1998 1997 1996
------------- ------------ ------------

Provision for income taxes at
statutory rate $ (4,020,000) $(11,282,000) $ 120,000
Acquisition of in process research
and development 44,000 10,047,000
Stock-based compensation 17,000 98,000
State income taxes, net of
federal benefit (683,000) (995,000) 10,000
Other 5,000 7,000 9,000
Change in valuation allowance 4,637,000 2,125,000 (139,000)
------------ ------------ ------------
Provision $ -- $ -- $ --
============ ============ ============


At April 30, 1998 and 1997, the Company had net deferred tax assets,
all of which had been offset by a valuation allowance as follows:



1998 1997
------------ ------------

Net operating loss carryforwards $ 11,635,000 $ 7,092,000
Stock-based compensation 477,000 297,000
General business and research and
development credits 56,000 56,000
Inventory reserve 17,000
Accrued liabilities 244,000 313,000
------------ ------------
12,412,000 7,775,000
Less valuation allowance (12,412,000) (7,775,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============



F-22
79

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------


At April 30, 1998, the Company and its subsidiary have federal net
operating loss carryforwards of $31,316,000 and $2,986,000 and tax credit
carryforwards of $64,000 and $59,000, respectively. The net operating loss
carryforwards expire beginning in 1999, with the majority of the operating
losses expiring in 2012 and 2013. The net operating losses applicable to its
subsidiary can only be offset against future income of its subsidiary. The tax
credit carryforwards generally expire in 2002 and are available to offset future
taxes of the Company or its subsidiary.

Due to ownership changes in the Company's common stock, there will be
limitations on the Company's ability to utilize its net operating loss
carryforwards in the future. The impact of the restricted amount has not been
calculated as of April 30, 1998.


10. RELATED PARTY TRANSACTIONS

Certain stockholders and directors, through their separate businesses,
have provided the Company with various legal, accounting and consulting
services. A summary of such professional fees for each of the three years in the
period ended April 30 are as follows:



1998 1997 1996
-------- -------- --------

Professional fees paid $213,195 $282,123 $377,378
Professional fees expensed $163,195 $266,628 $170,659
Professional fees payable at April 30 $ -- $ 50,000 $ 65,495


During September 1997, a previous director, whose firm provides legal
service to the Company, did not stand for re-election of the Company's Board of
Directors. Accordingly, expenses incurred to that firm by the Company after
October 27, 1997, have been included as unrelated general and administrative
expenses in the accompanying financial statements.


11. BENEFIT PLAN

During fiscal year 1997, the Company adopted a 401(k) benefit plan
(Plan) for all employees who are over age 21, work at least 24 hours per week
and have three or more months of continuous service. The Plan provides for
employee contributions of up to a maximum of 15% of their compensation or
$10,000. The Company made no matching contributions to the Plan for the fiscal
year 1997 and 1998.


12. SUBSEQUENT EVENTS

During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line (Equity Line) with two institutional investors,
expiring in June 2001. Under the terms of the Equity Line, the Company may, in
its sole discretion, and subject to certain restrictions, periodically sell
(Put) shares of the Company's common stock for up to $20,000,000 upon the
effective registration of the Put shares. After effective registration for the
Put shares, unless an increase is otherwise agreed to, $2,250,000 of Puts can be
made every quarter, subject to share issuance volume limitations identical to


F-23


80

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

those set forth in Rule 144(e). At the time of each Put, the investors will be
issued a warrant, expiring on December 31, 2004, to purchase up to 10% of the
amount of common stock issued to the investor at the same price at the time of
the Put.

The Equity Line provided for immediate funding of $3,500,000 in
exchange for 2,545,454 shares of common stock. One-half of this amount is
subject to adjustment at three months after the effective date of the
registration statement registering these shares with the second half subject to
adjustment six months after such effective date of the registration of these
shares. At each adjustment date, if the market price at the three or six month
period ("Adjustment Price") is less than the initial price paid for the common
stock, the Company will be required to issue additional shares of its common
stock equal to the difference between the amount of shares which would have been
issued if the price had been the Adjustment Price for $1,750,000. The Company
will also be required to issue additional warrants at each three month and six
month period for 10% of any additional shares issued. Future Puts under the
Equity Line will be priced at a 15% discount on the 10 day low closing bid
price.

In July 1998, the Company renegotiated its short term-note payable
agreement with a construction contractor to provide for immediate payment by the
Company of $500,000 and an extension of time to pay the remaining balance of
approximately $1,885,000 to August 17, 1998 (Note 4). Interest on the remaining
balance is payable under the same terms as the original note. In connection with
the extension agreement, the Company issued an additional warrant, expiring in
July 2001, to purchase up to 95,000 shares of the Company's common stock at
$1.37 per share.

During the same period, the Company entered into an agreement for the
sale and subsequent leaseback of its facilities, which consists of two buildings
located in Tustin, California. The sale/leaseback transaction is with an
unrelated entity and provides for the leaseback of the Company's facilities for
a ten-year period with two five-year options to renew. Proceeds from the sale of
the Company's facilities are expected to be sufficient to retire the mortgage
notes payable on the facilities as well as the amounts owed to the contractor
for the upgrade and expansion of its antibody production facilities. As the
sale/leaseback agreement is in escrow and subject to completion of normal due
diligence procedures by the buyer, there is no assurance that the transaction
will be completed on a timely basis or at all. Should the transaction not be
completed by August 17, 1998, the Company would be required to utilize current
cash funds to retire the $1,885,000 remaining balance owed to the contractor and
would be required to find another buyer for the building or obtain alternative
sources of financing.

In conjunction with the conversion of the Class C Stock (Notes 7 and
8), the Company issued warrants to purchase the Company's common stock at $.6554
per share. Under the terms of the Class C Stock Agreement, the Company has the
right to redeem the warrants upon a minimum 20 days notice (Notice Period) for
$.01 per share provided that the closing bid price of the Company's common stock
equals or exceeds $.98 per share for the 20 most recent consecutive trading days
prior to the redemption date, including the Notice Period. The warrantholder may
exercise the warrants for cash, on a cashless basis or any combination thereof.
On July 17, 1998, the Company notified the holders of the Class C Stock of its
intention to redeem any unexercised warrants on August 6, 1998 that had been
issued in conjunction with the 5% Adjustable Class C Preferred Stock (Class C
Stock) financing. Assuming a closing bid price of the Company's common stock of
$1.50 per share, if the warrantholders elect to exercise on a cashless basis,
the Company will issue approximately 2,295,000 shares of its common stock. If
all of the warrantholders elect to

F-24


81

TECHNICLONE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------

exercise on a cash basis, the Company will receive approximately $2,672,000 and
will issue approximately 4,076,000 shares of its common stock. Should the
closing bid price of the Company's common stock not remain above $.98 during the
period from July 17, 1998 through August 6, 1998, the Company's redemption of
the warrants would be nullified. If the warrant redemption is nullified, the
Company would not receive any proceeds from the warrant redemption and any
unexercised warrants could remain outstanding at the election of the
warrantholder.

Subsequent to April 30, 1998 and through June 15, 1998, the Company
granted approximately 2,728,000 options to employees and consultants of the
Company under the Company's 1996 Stock Option Plan at prices ranging from $1.38
per share to $1.59 per share.

Also subsequent to April 30, 1998, the Company renegotiated a severance
agreement with its former Chief Executive Officer (CEO). The Company's former
CEO's employment agreement provided that the Company make immediate and
substantial cash expenditures upon his termination. The Company did not have
sufficient cash resources to fulfill its obligations under the former CEO's
employment agreement. Accordingly, at the direction of the Board of Directors,
the Company negotiated a new Severance Agreement with its former CEO to conserve
the cash which it had on hand at March 2, 1998. The new Severance Agreement
provides for its former CEO to be paid $300,000 a year for the period beginning
March 1, 1998 through March 1, 2000. Unexercised and unvested outstanding stock
options on March 1, 1998, will vest and be paid as follows: one-third of the
unexercised, unvested options outstanding on March 1, 1998 will vest immediately
and be paid to the former CEO on December 31, 1998; one-third of the
unexercised, unvested and outstanding options on March 1, 1998, will vest on
March 1, 1999 and be paid on December 31, 1999; and one-third of the
unexercised, unvested and outstanding options on March 1, 1998, will vest and be
paid on March 1, 2000. In addition, the Company will make appropriate payments,
at the bonus rate, to the appropriate taxing authorities. During the employment
period, beginning on March 1, 1998 and ending on March 1, 2000, the former CEO
will, with certain exceptions, be eligible for Company benefits. Pursuant to the
Severance Agreement, the former CEO will be available to work for the Company
for a minimum of 25 hours per week. In addition, as part of the former CEO's
agreement to modify his existing severance package, the Company agreed that if
the former CEO did not compete during the period beginning March 1, 1998 and
ending February 29, 2000, the Company will, on March 1, 2000, pay the former CEO
an amount equal to his note of $350,000 (Note 2), plus all accrued interest
thereon which will be used to retire the respective note.


F-25


82

TECHNICLONE CORPORATION SCHEDULE II

VALUATION OF QUALIFYING ACCOUNTS
FOR THE PERIOD ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------



BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------- ---------- ----------- ---------- ---------


Lower of cost or market inventory reserve for
the year ended April 30, 1996 $ 98,722 $ 237,931 $(310,131) $ 26,522

Lower of cost or market inventory reserve for
the year ended April 30, 1997 $ 26,522 $ 98,988 $ (79,885) $ 45,625

Lower of cost or market inventory reserve for
the year ended April 30, 1998 $ 45,625 $ -- $ (45,625) $ --

Valuation reserve for accounts receivable for
the year ended April 30, 1996 $ -- $ 175,000 $ -- $ 175,000

Valuation reserve for accounts receivable for
the year ended April 30, 1997 $ 175,000 $ -- $ -- $ 175,000

Valuation reserve for accounts receivable for
the year ended April 30, 1998 $ 175,000 $ -- $ -- $ 175,000



F-26