<PAGE>   1


                                 UNITED STATES
                       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 AND
      EXCHANGE ACT OF 1934
      For the fiscal year ended December 31, 1996
                                       or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the transition period from ______ to ____

Commission file number: 0-19311

                        IDEC PHARMACEUTICALS CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

California                                                          33-0112644
- -------------------------------                            -------------------  
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                             Identification No.)


               11011 Torreyana Road, San Diego, California  92121
              ---------------------------------------------------
              (Address of principal executive offices) (Zip code)

                                 (619) 550-8500
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act: None
                                                            ----------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
                                                            par value
                                                            -----------------
                                                            (Title of class)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   X    No 
                                               -----     -----

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ X ]

    As of January 31, 1997, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $399,448,000.  (Based
upon the "closing" price as reported by the Nasdaq National Market on January
31, 1997).  This number is provided only for the purposes of this report and
does not represent an admission by either the Registrant or any such person as
to the status of such person.

    As of January 31, 1997, the Registrant had 18,085,087 shares of its common
stock, no par value, issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on May 22, 1997 are incorporated by reference into Part
III.

<PAGE>   2
                        IDEC PHARMACEUTICALS CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                                                        <C>
Risk Factors  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1


PART I:


Item 1.    Business   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    7


Item 2.    Properties   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   23


Item 3.    Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   23


Item 4.    Submission of Matters to a Vote of Shareholders  . . . . . . . . . . . . . . . . . . . . . . .   23


PART II:


Item 5.    Market for Registrant's Common Equity and Related Shareholder Matters  . . . . . . . . . . . .   24


Item 6.    Selected Financial Data  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   24


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations  . . . .   24


Item 8.    Consolidated Financial Statements and Supplementary Data   . . . . . . . . . . . . . . . . . .   24


Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   . . . .   24


PART III:


Item 10.   Directors and Executive Officers of the Registrant   . . . . . . . . . . . . . . . . . . . . .   25


Item 11.   Executive Compensation   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   25


Item 12.   Security Ownership of Certain Beneficial Owners and Management   . . . . . . . . . . . . . . .   25


Item 13.   Certain Relationships and Related Transactions   . . . . . . . . . . . . . . . . . . . . . . .   25


PART IV:


Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K   . . . . . . . . . . . . . .   25
</TABLE>







<PAGE>   3
        This Form 10-K contains predictions, estimates and other forward-
looking statements that involve a number of risks and uncertainties. While 
this outlook represents our current judgment on the future direction of the
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested above. IDEC Pharmaceuticals
Corporation undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof other than required by the Securities and Exchange
Act of 1934 or the rules and regulations promulgated thereunder.

                                  RISK FACTORS

         Lengthy Regulatory Process; No Assurance of Regulatory Approvals

   The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of IDEC Pharmaceuticals Corporation's ("IDEC
Pharmaceuticals" or the "Company") 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 United States Food
and Drug Administration ("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 regulations.

   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 Biological License Application ("BLA"), (v) FDA review of the
BLA, and (vi) satisfactory completion of a 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.  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
safety risk.

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

   Both before and after approval is obtained, violations of regulatory
requirements, may result in various adverse consequences, including the FDA's
delay in approving or refusal to approve a product, withdrawal of an approved
product from the market, and/or the imposition of criminal penalties against the
manufacturer and/or 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 product, manufacturer or holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.

   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 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 foreign licensees, other than in Canada, to obtain regulatory
approval for marketing its products in foreign countries.





                                       1

<PAGE>   4
   In February 1997, the Company and Genentech, Inc. ("Genentech") submitted
BLA's to the FDA for IDEC-C2B8 (rituximab) as a single agent therapy for the
treatment of relapsed low grade or follicular non-Hodgkin's  lymphoma. F.
Hoffmann-La Roche Ltd ("Hoffmann-La Roche"), also submitted, through one of its
subsidiaries in the European Union, a Marketing Authorization Application
("MAA") with the European Medicines Evaluation Agency ("EMEA") for marketing
IDEC-C2B8 in Europe. There can be no assurance that FDA and EMEA approval of
the BLA's and MAA submitted by the Company, Genentech and Hoffmann-La Roche
will be granted on a timely basis, if at all, and delays in receipt or failure
to receive regulatory approval could have a material adverse effect on the
Company's business, financial condition and results of operations.

   Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which generally is a
disease or condition that affects fewer than 200,000 individuals in the United
States. Orphan drug designation must be requested before submitting a BLA.
After the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicly disclosed by the
FDA. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process. If a product that has
an orphan drug designation subsequently receives FDA approval for the
indication for which it has such designation, the product is entitled to orphan
exclusivity, i.e., the FDA may not approve any other applications to market the
same drug for the same indication, except in certain very limited
circumstances, for a period of seven years.

   In 1994, the Company obtained orphan drug designation for IDEC-C2B8,
IDEC-Y2B8 and IDEC-In2B8 from the FDA to treat low grade B-cell lymphoma. There
can be no assurance that any of these compounds will receive orphan exclusivity
for the low grade B-cell lymphoma indication, and it is possible that
competitors of the Company could obtain approval, and attendant orphan drug
exclusivity, for these same compounds for the low grade B-cell lymphoma
indication, thus precluding the Company from marketing its products for the
same indication in the United States.  In addition, even if the Company does
obtain orphan exclusivity for any of its compounds for low grade B-cell
lymphoma, there can be no assurance that competitors will not receive approval
of other, different drugs or biologics for low grade B-cell lymphoma. Although
obtaining FDA approval to market a product with orphan drug exclusivity can be
advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation will remain in effect in the future.

         Uncertainties Associated with Clinical Trials

   The Company has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety, efficacy and applicability of its
potential products.  The rate of completion of the Company's clinical trials is
dependent upon, among other factors, the rate of patient enrollment. Patient
enrollment is a function of many factors, including the nature of the Company's
clinical trial protocols, existence of competing protocols, size of the patient
population, proximity of patients to clinical sites, changes in managed care and
eligibility criteria for the study.  Delays in patient enrollment will result in
increased costs, which could have a material adverse effect on the Company.  The
Company cannot ensure 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.  Thus, 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 potential products.
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 or will support the
Company's submission of a BLA.

         Reliance on Third Party Development and Marketing Efforts

   The Company has adopted a research, development and product
commercialization strategy that is dependent upon various arrangements with
strategic partners and others.  The success of the Company's products is
substantially dependent upon the success of these outside parties in performing
their obligations, which include, but are not limited to, providing funding,
performing research and development, fulfilling long term manufacturing
demands and marketing, distribution and sales with respect to the Company's
products.  The Company's strategic partners may also develop products that may
compete with the Company.  Although the Company believes that its partners have
an economic incentive to succeed in performing their contractual obligations,
the amount and timing of





                                       2

<PAGE>   5



resources that they devote to these activities is not within the control of the
Company.  There can be no assurance that these parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements.  The Company has entered into collaborative research and
development and license agreements with Genentech, Zenyaku Kogyo, Ltd.
("Zenyaku"), SmithKline Beecham p.l.c. ("SmithKline Beecham"), Mitsubishi
Chemical Corporation ("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and
Eisai Co., Ltd. ("Eisai").  These agreements generally may be terminated at any
time by the strategic partner, typically on short notice to the Company.  If one
or more of these partners elect to terminate their relationship with the
Company, or if the Company or its partners fail to achieve certain milestones,
it could have a material adverse effect on the Company's ability to fund the
related programs and to develop any products that may have resulted from such
collaborations. There can be no assurance that these collaborations will be
successful.  In addition, some of the Company's current partners have certain
rights to control the planning and execution of product development and clinical
programs, and there can be no assurance that such partners' rights to control
aspects of such programs will not impede the Company's ability to conduct such
programs in accordance with the schedules currently contemplated by the Company
for such programs and will not otherwise impact the Company's strategy.

         Limited Manufacturing Experience and Dependence on Contact Manufacturer

   The Company has not yet commercialized any therapeutic products.  To conduct
clinical trials on a timely basis, to obtain regulatory approval and to be
commercially successful, the Company must manufacture its products either
directly or through third parties in commercial quantities in compliance with
regulatory requirements and at an acceptable cost.  Although the Company has
produced its products in the laboratory, scaled its production process to pilot
levels and has the ability to manufacture limited commercial quantities of
certain of its products, the Company has not received regulatory approval for
such production.  The Company anticipates that production of its products in
commercial quantities will create technical as well as financial challenges for
the Company.  The Company has limited experience in manufacturing, and no
assurance can be given as to the ultimate performance of the Company's
manufacturing facility in San Diego, its suitability for approval for
commercial production or the Company's ability to make a successful transition
to commercial production.

   The Company is dependent upon Genentech to fulfill long term manufacturing
demands for its IDEC-C2B8 product and SmithKline Beecham to fulfill all of the
manufacturing requirements for IDEC-CE9.1.  Genentech is currently constructing
a larger manufacturing plant to satisfy such long term demands.  The Company is
considering the addition of another manufacturing facility to meet its
long term requirements for additional products under development.  Failure by
the Company or its strategic partners to establish additional manufacturing
capacity on a timely basis would have a material adverse effect on the Company.

   In November 1996, the Company contracted with Covance Biotechnology
Services, Inc. ("Covance") for the manufacture of the Company's antibodies,
IDEC-Y2B8 and IDEC-In2B8, which are radiolabeled for the treatment of
non-Hodgkin's lymphoma that the Company is also developing in partnership with
Genentech. The Company is dependent upon Covance to fulfill its manufacturing
demands for clinical quantities of IDEC-Y2B8.  There can be no assurance that
Covance will be able to complete any such manufacturing contract in a timely or
cost-effective manner, if at all, or that the Company could obtain such
capacity from others. Failure by Covance to meet the Company's manufacturing
needs will result in delayed clinical trials for IDEC-Y2B8 and IDEC-In2B8 and
may have a material adverse effect on the Company.

         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 secret and orphan
drug designation. The Company has title or exclusive rights to one issued and
six allowed United States patents, 29 United States patent applications and
numerous corresponding foreign patent applications, and has licenses to patents
or patent applications of 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. 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 not be held invalid or unenforceable by a court of
competent jurisdiction. Enforcement of the Company's patents may require
substantial financial and human resources. Moreover, the





                                       3

<PAGE>   6



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
cost to the Company.

   A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, competitors may have filed applications for or have been issued
patents and are likely to 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, however, patents may issue with
claims that conflict with the Company's own patent filings or read on its own
products. There can be no assurance that patents do not already exist in the
United States or in foreign countries or that patents will not be issued that
would entail substantial costs to challenge and that, if unsuccessfully
challenged, would have a material adverse effect on the Company's ability to
market its products. Specifically, the Company is aware of several patents and
patent applications which may affect the Company's ability to make, use and
sell its products. 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
infringement or validity of such patents are 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 or market its products would be materially
adversely affected.

   The owners, or licensees of the owners, of these patents may assert that one
or more of the Company's products infringe one or more claims of such patents.
If legal action is commenced against the Company to enforce any of these
patents and the plaintiff in such action prevails, the Company could be
prevented from practicing the subject matter claimed in such patents. In such
event or under other appropriate circumstances, the Company may attempt to
obtain licenses to such patents.  However, no assurance can be given that any
owner would license the patents to the Company at all or on terms that would
permit commercialization of the Company's products. An inability to
commercialize such products could have a material adverse effect on the
Company's operations and ability to pursue its long term objectives.

       Additional Financing Requirements and Uncertain Access to Capital Markets

   The Company has expended and will continue to expend substantial funds to
complete the research, development, manufacturing and marketing of its
products.  The Company may seek additional funding for these purposes through a
combination of new collaborative arrangements, strategic alliances, additional
equity or debt financings or from other sources.  There can be no assurance
that such additional funds will be available on acceptable terms, if at all.
Even if available, the cost of funds may result in substantial dilution to
current shareholders.  If adequate funds are not available from operations or
additional sources of financing, the Company's business could be materially and
adversely affected.

         Limited Sales and Marketing Experience

   Commercialization of the Company's products is expensive and time-consuming.
The Company has adopted a strategy of pursuing collaborative agreements with
strategic partners that provide for co-promotion of certain of the Company's
products.  In the event that the Company elects to participate in co-promotion
efforts in the United States or Canada, and in those instances where the Company
has retained exclusive marketing rights in specified territories, the Company
will need to build a sales and marketing capability in the targeted markets.
The Company currently has limited marketing and sales personnel. There can be no
assurance that the Company will be able to establish a successful direct sales
and marketing capability in any or all targeted markets or that it will be
successful in gaining market acceptance for its products.  To the extent that
the Company enters into co-promotion or other licensing arrangements, any
revenues received by the Company will be dependent on the efforts of third
parties and there can be no assurance that such efforts will be successful.
Outside of the United States and Canada, the Company has adopted a strategy to
pursue collaborative arrangements with established pharmaceutical companies for
marketing, distribution and sale of its products. There can be no assurance that
any of these companies or their sublicensees will successfully market,
distribute or sell the Company's products or that the Company will be able to 





                                       4

<PAGE>   7



establish and maintain successful co-promotion or distribution arrangements.
Failure to establish a sales capability in the United States or outside the
United States may have a material adverse effect on the Company.

         History of Operating Losses; Accumulated Deficit

   The Company has incurred annual operating losses since its inception in
1985.  As of December  31, 1996, the Company's accumulated deficit was
approximately $83.8 million.  Depending on the commercial success of IDEC-C2B8,
the Company anticipates that it will continue to incur operating losses over at
least the next one to two years.  Such losses have been and will be principally
the result of the various costs associated with the Company's research and
development, clinical and manufacturing activities.  The Company has not
generated operating profits from the sale of its products.  All revenues to
date have resulted from collaborative research, development and licensing
arrangements, contract manufacturing arrangements, research grants and interest
income.  The Company has no products approved by the FDA or any foreign
authority and does not expect to achieve profitable operations on an annual
basis unless product candidates now under development receive FDA or foreign
regulatory approval and are thereafter commercialized successfully.

         Possible Volatility of Stock Price

   The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies.  In addition, the market price of the Company's common
stock, like the stock prices of many publicly traded biotechnology companies,
has been highly volatile.  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.  It is likely that, in some future
quarter, the Company's operating results will be below the expectations of
public market analysts and investors.  In such event, the price of the
Company's common stock would likely be materially adversely affected.

         Uncertainties Regarding Health Care Reimbursement and Reform

   The future revenues and profitability of biopharmaceutical companies as well
as the availability of capital may be affected by the continuing efforts of
government and third party payors to contain or reduce costs of health care
through various means.  For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government controls.  While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the
Company's business, financial condition or prospects.

   The Company's ability to commercialize its products successfully will depend,
in part, on the extent to which appropriate reimbursement levels for the cost of
such products and related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs").  Third party payors are increasingly challenging the
prices charged for medical products and services.  Also, the trend 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 products.  The cost containment measures that
health care payors and providers are instituting and the effect of any health
care reform could materially adversely affect the Company's ability to operate
profitably.

         Product Liability Exposure

   Clinical trials, manufacturing, marketing and sale of any of the Company's
or its strategic partners' pharmaceutical products or processes licensed by the
Company may expose the Company to product liability claims.  The Company
currently carries limited product liability insurance.  There can be no
assurance that the Company or





                                       5

<PAGE>   8



its strategic partners will be able to continue to maintain or obtain
additional insurance or, if available, that sufficient coverage can be acquired
at a reasonable cost.  An inability to obtain sufficient insurance coverage at
an acceptable cost or otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of pharmaceutical
products developed by the Company or its strategic partners.  A product
liability claim or recall would have a material adverse effect on the business
and financial condition of the Company.

     Environmental Concerns

   The Company's research and development involves 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 research efforts may only be
made at approved facilities. Approval of a site in California has been delayed
indefinitely. The Company currently stores such radioactive materials on site.
The Company may incur substantial cost to comply with environmental
regulations.





                                       6

<PAGE>   9

                                     PART I


ITEM 1. BUSINESS.

   IDEC Pharmaceuticals Corporation ("IDEC Pharmaceuticals" or the "Company") is
a biopharmaceutical company developing products for the long term management of
cancers and autoimmune and inflammatory diseases. The Company is currently
focused on non-Hodgkin's B-cell lymphomas, which afflict approximately 240,000
patients in the United States, and rheumatoid arthritis, which afflicts
approximately 2 million people in the United States. The Company's two antibody
products for treatment of non-Hodgkin's B-cell lymphomas are being developed in
collaboration with Genentech, Inc. ("Genentech")  in the United States.  C2B8 is
being developed in collaboration with Genentech's affiliate, F. Hoffmann-La
Roche Ltd ("Hoffmann-La Roche"), worldwide except in the United States and
Japan, and with Zenyaku Kogyo, Ltd. ("Zenyaku") in Japan.  The Company's lead
PRIMATIZED antibody product for the treatment of rheumatoid arthritis is being
developed worldwide in collaboration with SmithKline Beecham. IDEC
Pharmaceuticals has seven additional product candidates in various stages of
development.

                                   BACKGROUND

         Antibodies and the Immune System

   The immune system is composed of specialized cells, including B cells and T
cells, that function in the recognition, destruction and elimination of disease
causing foreign substances and of virally infected or malignant cells. The role
of these specialized cells is determined by receptors on the cell surface which
govern the interaction of the cell with foreign substances and with the rest of
the immune system. For example, each differentiated B cell of the immune system
has a different antibody anchored to its surface which serves as a receptor to
recognize foreign substances. This antibody then triggers the production of
additional antibodies which as free-floating molecules bind to and eliminate
these foreign substances. Each foreign substance is individually identifiable
by structures on its surface known as antigens, which serve as binding sites
for the specific antibodies. T cells play more diverse roles, including the
identification and destruction of virally infected or malignant cells.

   A variety of technologies have been developed to produce antibodies as
therapeutic agents. These include hybridoma technology and molecular biology
techniques such as gene cloning and expression, which can now be applied to the
generation, selection and production of hybrid monoclonal antibody varieties
known as chimeric and humanized antibodies, as well as strictly human
antibodies. Chimeric antibodies are constructed from portions of non-human
species (e.g., mouse) antibodies and human antibodies. In these applications,
the portion of the antibody responsible for antigen binding (the "variable
region") is taken from a non-human antibody and the remainder of the antibody
(the "constant region") is taken from a human antibody. Compared to mouse
("murine") monoclonal antibodies, chimeric antibodies generally exhibit lower
immunogenicity (the tendency to trigger an often adverse immune response such
as a human anti-mouse antibody, or "HAMA" response), are cleared more slowly
from the body and function more naturally in the human immune system.
Humanized antibodies can be constructed by grafting several small pieces of a
murine antibody's variable region onto a constant region framework provided by
a human antibody. This process, known as "CDR grafting," reduces the amount of
foreign materials in the antibody, rendering it closer to a human antibody.
However, the construction of humanized antibodies by CDR grafting requires
complex computer modeling, and the properties of the resulting antibody are not
completely predictable and may, in fact, still trigger a HAMA response.

         Non-Hodgkin's B-cell Lymphomas

   As with other cell types in the body, B cells and T cells may become
malignant and grow as immune system tumors, such as lymphomas.  Non-Hodgkin's
B-cell lymphomas are cancers of the immune system which currently afflict
approximately 240,000 patients in the United States.  Although there are
treatments for non-Hodgkin's B-cell lymphomas, there are currently no products
in the United States that have been approved by the FDA for use in treating
these cancers. Non-Hodgkin's B-cell lymphomas are diverse with respect to
prognosis and treatment, and are generally classified into one of three groups
(low, intermediate or high grade) based on histology and clinical features. The
Company estimates that approximately 156,000 patients in the United States have
low grade, 70,000 have intermediate grade, and 14,000 have high grade non-
Hodgkin's B-cell lymphoma. Patients with low grade lymphomas have a fairly long
life expectancy from the time of diagnosis (median survival 6.6 years), despite
the fact





                                       7

<PAGE>   10



that low grade lymphomas are almost always incurable. Intermediate grade and
high grade lymphomas are more rapidly growing forms of these cancers, which in
a minority of cases can be cured with early, aggressive chemotherapy. New
diagnoses of non-Hodgkin's lymphomas have increased approximately 7% annually
over the past decade, with 53,600 new diagnoses estimated for 1997. The
increase is due in part to the increasing prevalence of lymphomas in the AIDS
patient population. In approximately 90% of the cases in the United States,
non-Hodgkin's lymphomas are of B-cell origin, the remainder are T-cell
lymphomas.

   Owing to the fluid nature of the immune system, B-cell lymphomas are usually
widely disseminated and characterized by multiple tumors at various sites
throughout the body at first presentation. Treatment courses with chemotherapy
or radiation therapy are the current standard of care and often result in a
limited number of remissions for patients with B-cell lymphomas. The majority
of patients in remission will relapse and ultimately die either from their
cancer or from 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 side effects or opportunistic infections,
which can result from the use of chemotherapy and radiation therapy.

         Autoimmune and Inflammatory Diseases

   Rheumatoid arthritis, systemic lupus erythematosus ("SLE"), psoriasis,
inflammatory bowel disease ("IBD") and multiple sclerosis ("MS") are autoimmune
and inflammatory diseases that require ongoing therapy and afflict more than 6
million patients in the United States. Of these, approximately 2 million people
are afflicted with rheumatoid arthritis. Autoimmune disease occurs when the
patient's immune system goes awry, initiating a cascade of events which results
in an attack by the patient's immune system against otherwise healthy tissue
and often includes inflammation of the involved tissue. In rheumatoid
arthritis, the disease attacks the synovial lining of the patient's joints,
usually resulting in the destruction of the joints of the hands, hips and
knees. The patient's condition evolves from constantly painful joints to the
disability of deformed, misaligned joints. Autoimmune diseases such as
rheumatoid arthritis are typically treated with products such as steroids and
nonsteroidal, anti-inflammatory agents and with other therapies, all of which
are limited for several reasons, including their lack of specificity and
ineffectiveness when used chronically. Furthermore, steroids suppress the
immune system and make the patient susceptible to infections while
nonsteroidal, anti-inflammatory agents have been implicated in the formation of
gastro-intestinal ulcerations.

         Antibodies and the Regulation of Immune System Cells

   Monoclonal antibodies may be used to bind to specific subsets of human
immune system cells and may act to deplete or to suppress the activity of the
targeted cells. Indeed, the high specificity of monoclonal antibodies enables
them to discriminately act against different types of B cells or T cells.
Depletion of diseased immune cells or suppression of disease-causing immune
activities may be possible by using antibodies that attach to specific
determinants on the surface of target immune system cells. In particular, the
individual B and T cells of the immune system express a broad variety of
surface determinants (cell surface markers). Such determinants not only
differentiate one cell type from another, but also differentiate individual
cells from other cells with specificity for different antigens.

                        IDEC PHARMACEUTICALS' TECHNOLOGY

   IDEC Pharmaceuticals is developing products for the long term management of
cancers and autoimmune and inflammatory diseases. The Company's antibody
products bind to specific subsets of human immune system cells and act to
deplete or to suppress the activity of these targeted cells.  These antibody
products are administered intravenously and target cells located in easily
accessible compartments of the body, specifically the blood, the lymphatic
fluid and the synovial fluid.  Where consistent with its business strategy, the
Company seeks to in-license technologies that complement and expand its
existing technology base.





                                       8

<PAGE>   11



   For treatment of non-Hodgkin's B-cell lymphomas, the Company's products
target a cell surface marker known as CD20 which is present only on B cells but
not on B cell precursors. These products act to reduce total B cell levels,
including both malignant and normal B cells. The depletion of normal B cells
observed in clinical experience, to date, has been only temporary, with
regeneration occurring within months. The Company believes that the successful
development of immunotherapeutic agents, such as IDEC-C2B8 and IDEC-Y2B8, will
complement and, in some cases, replace chemotherapeutic agents in the treatment
of non-Hodgkin's B-cell lymphomas.

   Due to their specificity and affinity for cell surface receptors, monoclonal
antibodies are also an attractive means by which to treat autoimmune diseases.
Attachment of monoclonal antibodies to specific cell surface receptors can be
used to suppress aberrant and unwanted immune activity. Historically, however,
the use of monoclonal antibodies as an ongoing therapy has been limited by the
body's rejection of the mouse-derived components of the antibodies. Murine
monoclonal antibodies, which are structurally different from human antibodies,
tend to trigger adverse immune reactions when used as therapies. These
reactions include a HAMA response in which the patient's immune system produces
antibodies against the therapeutic antibody, thus limiting its effectiveness.

   The Company has developed a proprietary PRIMATIZED antibody technology to
overcome HAMA responses and to avoid other immunogenicity problems by
developing monoclonal antibodies from primate, rather than mouse, B cells. These
antibodies are characterized by their strong similarity to human antibodies and
by the absence of mouse components. In March 1996, the Company received a
Notice of Allowance for a United States patent application claiming the
Company's PRIMATIZED antibodies. Underlying this proprietary technology is the
Company's discovery that macaque monkeys produce antibodies that are
structurally indistinguishable from human antibodies in their variable
(antigen-binding) regions. Further, the Company found that the macaque monkey
can be immunized to make antibodies that react with human, but not with
macaque, antigens. Genetic engineering techniques are then used to isolate the
portions of the macaque antibody gene which encode the variable region from a
macaque B cell. This genetic material is combined with constant region genetic
material from a human B cell and inserted into a host cell line which then
expresses the desired antibody specific to the given antigen. The result is a
part human, part macaque PRIMATIZED antibody which appears structurally to be
so similar to human antibodies that it may be accepted by the patient's immune
system as "self." This development allows the possibility of therapeutic
intervention in chronic diseases or other conditions that are not amenable to
treatment with antibodies containing mouse components.

   The Company has also discovered a proprietary antigen formulation, PROVAX,
which has shown the ability to induce cellular immunity, manifested by cytotoxic
T lymphocytes, in animals immunized with protein antigens. Cellular immunity is
a counterpart to antibody-based immunity and is responsible for the direct
destruction of virally infected and malignant cells. PROVAX is a combination of
defined chemical entities and may provide a practical means for the development
of effective immunotherapies that act through the induction of both antibody and
cell-mediated immunity. A United States patent has been issued to the Company
covering the PROVAX technology. The Company believes such immunotherapies may be
useful for the treatment of certain cancers and viral diseases.  Preliminary
studies also indicate that PROVAX can be safely administered by injection to
human subjects. The Company intends to make PROVAX available through licenses
and collaborations to interested partners for development of immunotherapeutic
vaccines.


                       PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

          Immune System Cancers

   IDEC Pharmaceuticals' primary objective with respect to treating
non-Hodgkin's B-cell lymphomas is to use its pan-B antibodies to target, bind
to and selectively eliminate both the patient's normal and malignant B cells.

   IDEC-C2B8. IDEC-C2B8 is a genetically engineered, chimeric pan-B antibody
designed to harness the patient's own immune mechanisms to destroy tumor cells.
Laboratory studies performed by the Company have shown that the antibody
attaches to the CD20 antigen on B cells and activates a group of proteins known
as "complement," leading to normal and malignant B-cell destruction.
Additionally, the antibody, when bound to the CD20 antigen, recruits
macrophages and natural killer cells to attack the B cell. Through these and
other mechanisms, the antibody utilizes the body's immune defenses to lyse
(rupture) and deplete B cells. B cells have the capacity to regenerate from
early precursor cells that do not express the CD20 determinant. The depletion
of normal B cells observed in clinical





                                       9

<PAGE>   12



experience to date has been only temporary, with normal B cell regeneration
occurring within months. The capacity of a tumor to regrow after treatment with
IDEC-C2B8 will depend on the number of malignant B cells, or malignant B-cell
precursors (if the malignancy first appeared within a precursor cell),
remaining after treatment.

   In 1996, the Company and Genentech completed a pivotal Phase III trial of
IDEC-C2B8 at over 30 clinical sites including leading cancer centers in the
United States and Canada. In this Phase III open label, single arm testing of
IDEC-C2B8 as a single agent therapeutic, each of the patients participating in
the study received four infusions of the antibody on an outpatient basis during
a 22-day period.  Of 151 evaluable patients, 76 responded to treatment with
IDEC-C2B8, for an overall response rate of 50%. Nine of these responses were
complete responses (6%) and 67 were partial responses (44%). Of the responding
patients, 70% were still in remission at over nine months' median follow-up.
Patients continue to be followed.

   The adverse events associated with IDEC-C2B8 are mostly infusion-related.
These side effects consist primarily of mild to moderate flu-like symptoms
(e.g., fevers, chills) and occur with greatest frequency upon initial
administration.  The symptoms are limited in duration to the period of
infusion, may be ameliorated with oral acetaminophen and diphenhydramine and
decrease significantly in frequency with subsequent infusions.

   In addition to these findings, the Company observed the disappearance from
the patients bone marrow of bcl-2, a chromosomal marker associated with
malignant cells, which was present prior to treatment.  The tumor marker gene
reverted to negative in the peripheral blood of over 70% of the patients who
were positive at baseline, and in the bone marrow of over 50% of patients who
were positive at baseline.  Researchers have previously reported clearance of
this marker from bone marrow with marrow transplantation regimens incorporating
ex vivo marrow purging and only rarely with chemotherapy regimens.  However,
the clinical significance of bcl-2 conversion has not yet been determined.

   The completion of this Phase III clinical trial supported  the submission in
February 1997, by the Company and Genentech, of BLA's to the FDA for IDEC-C2B8
(rituximab) as a single agent therapy for the treatment of relapsed low grade
or follicular non-Hodgkin's lymphoma. Hoffmann-La Roche also submitted,
through one of its subsidiaries in the European Union, a Marketing
Authorization Application ("MAA") with the European Medicines Evaluation Agency
("EMEA") for marketing IDEC-C2B8 in Europe.

   In 1996, the Company completed a Phase II clinical trial of IDEC-C2B8 in
combination with chemotherapy for the treatment of low-grade, B-cell lymphoma.
In this trial, patients were given alternating cycles of IDEC-C2B8 and CHOP
combination chemotherapy (a standard regimen of cyclophosphamide, doxorubicin,
vincristine and prednisone), beginning and ending with the antibody. In this
single arm trial, patients with low grade or follicular lymphoma received six
doses of IDEC-C2B8 over 21 weeks. Within this same time period, they also
received six cycles of CHOP chemotherapy.  Of the 35 patients completing all
treatments, 35 responded to treatment, for an overall response rate of 100%.
Twenty-two patients (63%) achieved a complete response and 13 (37%) achieved a
partial response.  Patients tolerated the combination of IDEC-C2B8 and CHOP
well; adverse events did not exceed those routinely observed with CHOP alone or
those associated with IDEC-C2B8 alone, indicating compatibility of the two
therapies. In addition, because IDEC-C2B8's mode of action is separate from
that of conventional anti-cancer drugs, the two treatments do not exhibit
overlapping toxicities. The addition of IDEC-C2B8 to the conventional
chemotherapy regimen is designed to extend both the quality and duration of
tumor remissions achievable with chemotherapy alone, without adding
significantly to the toxicity of chemotherapy.  This trial is an additional
step in the development of this product to show the possible breadth of
applications of antibody therapy for treatment of lymphomas.

   In 1996, the Company's strategic partner, Zenyaku, completed patient accrual
for a Phase I multi-dose clinical study in Japan of IDEC-C2B8. Doses of 250 and
375 mg/m2 were administered by intravenous infusion weekly for four weeks to
12 patients with B-cell lymphoma. The clinical study is designed to study
safety and toxicity.

   IDEC-Y2B8 and IDEC-In2B8. Due to the sensitivity of B-cell tumors to
radiation, radiation therapy has historically played, and continues to play, an
important role in the management of B-cell lymphomas. Radiation therapy
currently consists of external beam radian focused on certain areas of the body
with tumor burden. IDEC Pharmaceuticals is developing two antibody products
which are intended to deliver targeted immunotherapy by means of injectable
radiation to target sites expressing the CD20 determinant, such as lymphatic
B-cell tumors. In clinical testing, IDEC-In2B8 is first used to image the
patient's tumor and to provide information for determining the proper dose of
the therapeutic product. The low energy gamma particle emitted by IDEC-In2B8 is
detectable outside the body, thereby allowing an image to be taken. The
companion therapeutic product, IDEC-Y2B8, provides targeted radiation therapy
by emitting a high energy beta particle which is absorbed by surrounding
tissue, leading to tumor





                                       10

<PAGE>   13



destruction. The Company's objective with these products is to provide safer,
more effective radiation therapy than is possible with external beam radiation
and to provide this radiation therapy in an outpatient setting.

   IDEC-Y2B8 is an anti-CD20 murine antibody that is radiolabeled with the
isotope yttrium-90. This radioisotope is well suited for therapeutic purposes
because of its energy, radius of activity and half-life. It emits only beta
radiation. Other radioisotopes, such as iodine-131, emit both beta and gamma
radiation and at certain therapeutic doses require that the patient be
hospitalized and isolated in a lead-shielded room for several days. In
contrast, the beta particle emitted by yttrium-90 is absorbed by tissue
immediately adjacent to the antibody. The Company believes that this short
penetrating radiation will permit the use of the product in outpatient therapy.

   In August 1996, the Company initiated a Phase I/II clinical trial which
incorporates both IDEC-Y2B8 and IDEC-C2B8. In this open label, Phase I/II
clinical trial, patients with advanced, relapsed non-Hodgkin's B-cell lymphoma
receive pretreatment with IDEC-C2B8 to maximize tumor localization and
efficacy of subsequently administered IDEC-Y2B8.

   The Company completed a dose-escalating Phase I clinical trial with
IDEC-Y2B8 in early 1995. Single doses of IDEC-Y2B8 showed clinical activity
comparable to that of intensive, multiple dose, salvage chemotherapy, with
response durations exceeding those of the patients' most recent chemotherapy.

         Autoimmune and Inflammatory Products

   IDEC Pharmaceuticals is developing a new class of antibodies, termed
PRIMATIZED antibodies, that are of part human, part macaque monkey origin.
These antibodies are structurally similar to, and potentially indistinguishable
by a patient's immune system from, human antibodies.  PRIMATIZED antibodies may
provide therapeutic intervention for diseases or conditions not amenable to
chronic treatment with mouse-derived antibodies. The Company's objective with
its PRIMATIZED antibodies is to provide therapies that can be used to control
autoimmune diseases characterized by overactive immune functions. The Company
has entered into research and development collaborations with SmithKline
Beecham p.l.c. ("SmithKline Beecham"), Mitsubishi Chemical Corporation
("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and Eisai Co. Ltd.
("Eisai") which all utilize the Company's PRIMATIZED technology and which
target distinct, cell surface determinants. See "--License and Technology
Related Agreements."

   PRIMATIZED IDEC-CE9.1. Through its collaboration with SmithKline Beecham,
IDEC Pharmaceuticals is developing therapeutic products for the treatment of
autoimmune disease based on PRIMATIZED anti-CD4 antibodies. In order to develop
a PRIMATIZED anti-CD4 antibody, Company scientists immunized macaque monkeys
with the human CD4 antigen and harvested the resulting antibody-producing
immune cells. The gene responsible for the production of the desired anti-CD4
antibody was isolated and used to develop the PRIMATIZED anti-CD4 antibody,
IDEC-CE9.1. This antibody consists of a variable region from a macaque monkey
and a constant region, that portion responsible for interaction with the immune
system, from a human. Upon analysis of the amino acid sequences comprising the
IDEC-CE9.1 antibody, its structure was found to be indistinguishable from
antibodies normally produced by humans. In addition, IDEC-CE9.1 binds tightly
to the CD4 antigen and exhibits desirable immunosuppressive activities.

   In December 1996, SmithKline Beecham initiated a multinational Phase III
trial of IDEC-CE-9.1/SB 210396. This randomized, placebo-controlled Phase III
trial is intended to demonstrate efficacy of several regimens in relieving the
signs and symptoms of rheumatoid arthritis as defined by the American College of
Rheumatology ("ACR 20 criteria"). The effects on disease progression will also
be measured.  Based on the Phase II experience, Phase III dosing has been
slightly modified.  Patients in the current Phase III trial will receive either
twice weekly doses, weekly doses or placebo during the first month of treatment.
This "induction" regimen will be followed by periodic administration of single
doses of IDEC-CE9.1 with a goal of maintaining or extending disease remissions
while reducing the frequency of drug administration.

   In October 1996, the Company and SmithKline Beecham completed a Phase II
clinical trial of IDEC-CE9.1. The Phase II trial was a placebo- controlled
study of IDEC-CE9.1 in which a total of 122 evaluable patients received either
40mg, 80mg or 140mg intravenous doses of IDEC-CE9.1 or intravenous placebo.
Patients were randomized to treatment after withdrawal from DMARD therapy and a
four-week period of disease stabilization.  The respective





                                       11

<PAGE>   14



doses were administered twice weekly over a four-week period.  A clinically
significant treatment response, as measured in accordance with the ACR 20
criteria, was experienced by 77% of the patients in the highest dosage group
(140mg).  Likewise, 47% of patients responded to treatment in the 80mg group,
and 42% responded in the 40mg group compared to 17% of patients in the placebo
group.  The ACR 20 guidelines require an improvement in tender and swollen joint
counts that is at least more than 20%, along with improvement in three of five
other disease-related categories. In the 140mg, 80mg and 40mg groups, the median
time to clinical response was one week, two weeks and two and one-half weeks,
respectively.  Treatment of the 140mg group was discontinued due to the
development of mild to moderate rashes in three patients; however, this adverse
event was not observed in the other dose groups.  In addition, IDEC
Pharmaceuticals and SmithKline Beecham have begun expanding their investigation
of IDEC-CE9.1 for potential use in the treatment of asthma.

   In trials to date, IDEC-CE9.1 has been very well tolerated without serious
adverse events at doses associated with clinical improvement.  This experience
suggests potential for an improved safety profile compared to the current
so-called DMARDS used in rheumatoid arthritis such as methotrexate,
corticosteroids and gold compounds.  Further, in contrast to mouse-derived
antibodies, IDEC-CE9.1 has not been associated with serious infusion-related
adverse events.

   PRIMATIZED Anti-B7. In November 1993, the Company entered into a research
and development collaboration with Mitsubishi that focuses on the development
of PRIMATIZED antibodies directed at a B7 determinant. This B7 determinant
appears on the surface of antigen-presenting cells and is involved in the
interaction of these cells with T cells in triggering a cascade of immune
system responses. Antibodies directed at B7 determinants may block this cascade
and, therefore, may be useful in preventing unwanted immune responses in
certain inflammatory and chronic autoimmune conditions. Mitsubishi has actively
shared in the development process, generating animal models and participating
in research with the Company. This effort has resulted in the identification of
a PRIMATIZED antibody lead candidate which will undergo preclinical testing,
process development and manufacturing of clinical material during 1997.

   PRIMATIZED Anti-CD23. In December 1994, the Company entered into a
collaboration with Seikagaku aimed at the development of PRIMATIZED anti-CD23
antibodies for the potential treatment of allergic rhinitis, asthma and other
allergic conditions. Antibodies against the CD23 receptor on certain white
blood cells inhibit the production of an immune system molecule called
immunoglobulin class E, or IgE, which is known to trigger allergic conditions.
At the same time, anti-CD23 antibodies do not affect the production of the
immunoglobulins (the patient's own antibodies) responsible for granting
protective immunity to infectious agents. Thus, PRIMATIZED anti-CD23 antibodies
may provide a unique new approach to treating chronic illness such as allergic
rhinitis and asthma. This effort has resulted in the identification of a
PRIMATIZED antibody lead candidate which will undergo preclinical testing,
process development and manufacturing of clinical material during 1997.

   Humanized and PRIMATIZED Anti-gp39. In December 1995, the Company entered
into a research and development collaborative agreement with Eisai. The
collaboration focuses on developing humanized and PRIMATIZED antibodies against
the gp39 antigen. This antigen, also referred to as the CD40 ligand, is an
essential immune system trigger for B-cell activation and antibody production.
Potential target indications include transplantation and antibody-mediated
autoimmune diseases such as idiopathic thrombocytopenic purpura ("ITP") and
SLE.

   The development of a humanized anti-gp39 antibody is based on technology
that the Company licensed from Dartmouth University where researchers have
shown that the binding of gp39 to its CD40 receptor on B cells is essential for
proper immune system function. These researchers generated anti-gp39 antibodies
that blocked this T-cell and B-cell interaction and halted disease progression
in a variety of animal models of disease characterized by abnormal or unwanted
immune response. Moreover, when researchers ended the animals' anti-gp39
treatments, the animals' antibody-producing capacity returned to normal levels,
but their disease remained suppressed. Treatment with the anti-gp39 antibodies
appeared to have reset the animals' immune systems and restored a normal immune
response. Under the collaborative agreement, the Company and Eisai have agreed
to develop a humanized anti-gp39 antibody and launch additional efforts to
develop a second generation, PRIMATIZED anti-gp39 antibody. This effort has
resulted in the identification of a humanized anti-gp39 antibody lead candidate
which will undergo preclinical testing, process development and manufacturing
of clinical trial material in early 1997.





                                       12

<PAGE>   15
   Other Products

   The Company has discovered certain other products through the application of
its technology platform.

   Human Anti-RSV Antibodies. The Company has applied its technology to the
discovery and generation of fully human antibodies directed against the
respiratory syncytial virus ("RSV") which infects the lungs. RSV is responsible
for approximately 100,000 hospitalizations in the United States each year. The
Company intends to seek a commercial strategic partner with an infectious
disease franchise to conduct human clinical studies and to commercialize the
anti-RSV antibodies.

   PROVAX. The Company has developed a proprietary antigen formulation, PROVAX,
that when mixed with soluble antigens, safely induces antibody responses. CTLs
are important effectors of the immune response against virally infected or
cancerous cells and act by recognizing specific antigen fragments on those
cells. The Company announced in December 1995 that it had received a notice of
allowance for a United States patent covering methods using PROVAX to induce
specific CTL-mediated responses in humans and animals. The Company intends to
seek strategic partners for the development of PROVAX as an antigen formulation
for therapeutic vaccines.

   Research and development expenses of the Company were $26.8 million, $22.5
million and $21.2 million in 1996, 1995 and 1994, respectively, of which
approximately 53%, 46% and 76%, respectively, was sponsored by the Company and
the remainder of which was funded pursuant to product development collaboration
arrangements.  See "License and Technology-Related Agreements."


                                 MANUFACTURING

   From its inception, the Company has focused on establishing and maintaining a
leadership position in cell culture techniques for antibody manufacturing. Cell
culture provides a method for manufacturing of clinical and commercial grade
protein products by reproducible techniques at various scales, up to many
kilograms of antibody. The Company's state-of-the-art manufacturing facility is
based on the suspension culture of mammalian cells in stainless steel vessels.
Suspension culture fermentation provides greater flexibility and more rapid
production of the large amounts of antibodies required for pivotal trials than
the bench scale systems that were previously utilized by the Company. During
1995, the Company doubled the cell culture manufacturing capacity of its
facility with the installation of a second 2,750-liter production vessel that is
supported by existing upstream and downstream equipment. Consequently, the
Company believes it may be able to utilize its current facility for the early
commercialization of IDEC-C2B8 in the United States prior to relying on
additional capacity from a larger manufacturing plant currently under
construction by Genentech. However, commercial sale of product manufactured at
the Company's manufacturing facility may occur only after approval of a BLA
including facility inspection by the FDA. See "--Government Regulation."  During
1996, the Company added a clinical manufacturing area to supplement its existing
manufacturing facility.  The clinical manufacturing area has the capacity to
manufacture limited preclinical and clinical quantities of its product
candidates now under development.

   During 1996, the Company manufactured IDEC-C2B8, IDEC-Y2B8, IDEC-In2B8 and
other product candidates for clinical trials at its manufacturing facility in
San Diego, California. The Company anticipates that its facility in San Diego
should provide sufficient production capacity to meet clinical and early
commercial requirements of IDEC-C2B8. The Company is relying on Genentech to
fulfill long term manufacturing demands for its IDEC-C2B8 product and
SmithKline Beecham to fulfill all of the manufacturing requirements for
IDEC-CE9.1. The Company is considering the addition of another manufacturing
facility to meet its long term requirements for its future pipeline products.

   In November 1996, the Company contracted with Covance for the manufacture of
the Company's antibodies, IDEC-Y2B8 and IDEC-In2B8, for the radiolabeled
treatment of non-Hodgkin's lymphoma that the Company is developing in
partnership with Genentech. The Company is dependent upon Covance to fulfill
its manufacturing demands for its clinical development of IDEC-Y2B8 and
IDEC-In2B8.

   The Company has developed a method of engineering mammalian cell cultures
using a proprietary gene expression technology that rapidly and reproducibly
selects for stable cells, producing high levels of desired proteins.





                                       13

<PAGE>   16
This technology allows the efficient production of proteins at yields that may
be significantly higher, and costs that may be significantly lower, than
current, competing cell culture methods. In February 1997, the Company received
a Notice of Allowance for two United States patent applications covering the
Company's proprietary gene expression technology. IDEC Pharmaceuticals has
successfully applied this technology to the commercial scale production of
IDEC-C2B8.

   The Company has made its production technology platform available for
licensing to a small number of other biopharmaceutical and pharmaceutical
companies. This technology has been licensed to Genentech, Chugai and
Boehringer Ingelheim GmbH. Additionally, the Company is applying its gene
expression technology on a contract basis to develop specific high yielding
cell lines for firms seeking to shorten product development cycles and reduce
production costs. In 1996, the Company completed cell line development
contracts with Hoffmann-La Roche, Biogen and Pharmacia & Upjohn and a
manufacturing contract with OraVax, Inc.


                       PATENTS AND PROPRIETARY TECHNOLOGY

   The biopharmaceutical field is characterized by a large number of patent
filings. A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, 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 or in foreign countries or that patents will not be
issued that would have an adverse effect on the Company's ability to market its
products. Accordingly, the Company expects that commercializing monoclonal
antibody-based products may require licensing and/or cross-licensing of patents
with other companies in the field. There can be no assurance that the licenses,
which might be required for the Company's processes or products, would be
available on commercially acceptable terms, if at all. The ability to license
any such patents and the likelihood of successfully contesting the scope or
validity of such patents are 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 or market its products would be materially adversely
affected.

   IDEC Pharmaceuticals has title or exclusive rights to one issued and six
allowed United States patents, 29 United States patent applications and numerous
corresponding foreign patent applications. Certain other patents and/or
applications owned by third parties have been exclusively licensed, as in the
case of anti-gp39 technology licensed from Dartmouth University, or
non-exclusively licensed by IDEC Pharmaceuticals. The Company has filed
trademark applications in the United States, Canada and in certain international
markets for the trademarks "PRIMATIZED," "PROVAX" and "IDEC Pharmaceuticals."
"IDEC Pharmaceuticals" and "PRIMATIZED" have been registered as trademarks in
the United States.

   The Company has a pending United States patent application and foreign
counterparts broadly directed to its pan-B antibody technology, including
IDEC-C2B8, and the radioimmunoconjugates, IDEC-Y2B8 and IDEC-In2B8. The
Company's radioimmunoconjugate products include a patented chelating agent that
is nonexclusively licensed to the Company. The Company has received a Decision
to Grant from the European Patent Office on a patent covering IDEC-C2B8.
Genentech, IDEC Pharmaceuticals' collaborative partner for IDEC-C2B8, has
recently secured an exclusive license to a United States patent and counterpart
foreign patent applications assigned to Xoma Corporation ("XOMA") that relate
to chimeric antibodies against the CD20 antigen. Genentech has granted IDEC
Pharmaceuticals a sublicense to make, have made, use, and sell certain
products, including IDEC-C2B8, under such patents/applications. Genentech and
the Company will share certain up front licensing fees and any royalties due to
XOMA in the Genentech/IDEC co-promotion territory.

   The Company has filed for worldwide patent protection on its PRIMATIZED
antibody technology and its proprietary gene expression technology.  In March
1996, the Company received a Notice of Allowance for a United States patent
application claiming the Company's PRIMATIZED antibodies and in February 1997,
the Company received Notices of Allowance for two United States patent
applications covering its proprietary gene expression technology. These
applications generically and specifically cover the Company's PRIMATIZED
antibody and proprietary gene expression technology.





                                       14

<PAGE>   17
   PROVAX, the Company's antigen formulation, is the subject matter of an
issued United States Patent; foreign counterparts are pending. In addition,
United States and foreign patent applications have been filed on aspects of the
Company's proprietary high-yield gene expression technology. Specifically, the
Company is aware of several patents and patent applications which may affect
the Company's ability to make, use and sell its products, including:

         (i) United States patent applications and foreign counterparts filed
   by Bristol-Myers that disclose antibodies to a B7 antigen.

         (ii) A recently issued United States patent assigned to Columbia
   University which the Company believes has been exclusively licensed to
   Biogen, disclosing monoclonal antibodies to the 5C8 antigen found on T
   cells. The Company believes the 5C8 antigen and gp39, the target for the
   Company's anti-gp39 antibodies and its collaboration with Eisai, may be the
   same protein expressed on the surface of T cells.

         (iii) A number of issued patents that relate to various aspects of
   radioimmunotherapy or to methods of treating patients with anti-CD4
   antibodies.

         (iv) An issued United States patent assigned to Burroughs Wellcome
   that relates to expression of immunoglobulins in CHO cells.

   The owners, or licensees of the owners, of these patents may assert that one
or more of the Company's products infringe one or more claims of such patents.
If legal action is commenced against the Company to enforce any of these
patents and the plaintiff in such action prevails, the Company could be
prevented from practicing the subject matter claimed in such patents. In such
event or under other appropriate circumstances, the Company may attempt to
obtain licenses to such patents. However, no assurance can be given that any
owner would license the patents to the Company, at all or on terms that would
permit commercialization of the Company's products using such technology. An
inability to commercialize such products would have a material adverse effect
on the Company's operations and ability to pursue its long-term objectives.

   If the Company is required to enforce any of its patents, such enforcement
may require the use of substantial financial and human resources of the
Company. The Company may also have to participate in interference proceedings
if declared by the United State Patent and Trademark Office to determine
priority of invention, which typically take years to resolve and could also
result in substantial costs to the Company.

   Moreover, should the Company need to circumvent existing patents,
substantial delays and expense in product redesign and development or
significant legal expense and uncertainty in asserting noninfringement,
invalidity and/or unenforceability of any patent may also result. The Company
also relies upon unpatented trade secrets, and no assurance can be given that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or disclose such technology, or that the Company can meaningfully
protect such rights.

   IDEC Pharmaceuticals requires its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisers to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with IDEC Pharmaceuticals is to be kept confidential
and not disclosed to third parties except in specific circumstances.  In the
case of employees of the Company, the agreement provides that all inventions
conceived by such employees shall be the exclusive property of the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.


                   LICENSE AND TECHNOLOGY RELATED AGREEMENTS

   The Company has entered into one or more strategic partnering arrangements
for each of its principal product development programs. Through these strategic
partners, the Company is funding a significant portion of its product
development costs and is capitalizing on the production, development,
regulatory, marketing and sales capabilities of





                                       15

<PAGE>   18



its partners. Unless otherwise indicated, the amounts shown below as potential
payments include license fees, research and development fees and, with respect
to Genentech, SmithKline Beecham and Zenyaku, equity investments, but do not
include potential royalties. The Company's entitlement to such payments depends
on achieving milestone events related to development, clinical trials results
and regulatory approvals and other factors. These arrangements include:

   Genentech Inc. In March 1995, the Company and Genentech entered into a
collaborative agreement for the clinical development and commercialization of
the Company's anti-CD20 monoclonal antibody, IDEC-C2B8, for the treatment of
non-Hodgkin's B-cell lymphomas. In February 1996, the parties extended this
collaboration to include two radioconjugates, IDEC-Y2B8 and IDEC-In2B8.
Concurrent with the collaborative agreement, the Company and Genentech also
entered into an expression technology license agreement for a proprietary gene
expression technology developed by the Company and a preferred stock purchase
agreement providing for certain equity investments in the Company by Genentech.
Under the terms of these agreements, the Company may receive payments totaling
$57.0 million, subject to the attainment of certain milestone events, of which
$31.0 million has been recognized as of December 31, 1996. In addition, the
Company and Genentech will co-promote IDEC-C2B8 and IDEC- Y2B8 in the United
States and the Company and Genentech's sublicensee will co-promote IDEC-C2B8 in
Canada with the Company receiving a share of profits. Genentech will retain
commercialization rights throughout the rest of the world, except in Japan
where Zenyaku will be responsible for development, marketing and sales.
Genentech has granted Hoffmann-La Roche marketing rights outside of the United
States. The Company will receive royalties on sales outside the United States
and Canada. Additionally, pursuant to an expression technology license
agreement, the Company is entitled to receive royalties on sales of Genentech
products manufactured with the Company's proprietary gene expression
technology.  Genentech may terminate this agreement for any reason beginning on
the date of availability of data from the first Phase III clinical trial of
IDEC-C2B8. In connection with the collaboration, Genentech purchased shares of
the Company's convertible preferred stock. The collaborative agreement between
the Company and Genentech provides two independent mechanisms by which either
party may purchase or sell its rights in the co-promotion territory from/to the
other party. Upon the occurrence of certain events that constitute a change of
control of the Company, Genentech may elect to present an offer to the Company
to purchase the Company's co-promotion rights. The Company must then accept
Genentech's offer or purchase Genentech's co-promotion rights for an amount
scaled (using the profit sharing ratio between the parties) to Genentech's
offer. Under a second mechanism, after a specified period of commercial sales
and (i) upon a certain number of years of declining co-promotion profits or
(ii) if Genentech files for U.S. regulatory approval on a competitive product
during a limited period of time, either party may offer to purchase the other
party's co-promotion rights. The offeree may either accept the offer price or
purchase the offeror's co-promotion rights at the offer price scaled to the
offeror's share of co-promotion profits.

   SmithKline Beecham, p.l.c. In October 1992, the Company and SmithKline
Beecham entered into an exclusive worldwide collaborative research and license
agreement limited to the development and commercialization of therapeutic
products based on the Company's PRIMATIZED anti-CD4 antibodies. Under the terms
of this agreement, the Company may receive payments in excess of $60.0 million,
subject to the attainment of certain milestone events, of which $32.6 million
has been recognized as of December 31, 1996. The Company will receive funding
for anti-CD4 related research and development programs, as well as royalties
and a share of co-promotion profits in the United States and Canada on sales of
products which may be commercialized as a result of the collaboration. At any
time, SmithKline Beecham may terminate this agreement by giving the Company 30
days' written notice based on a reasonable determination that the products do
not justify continued development or marketing. In connection with the
collaboration, SmithKline Beecham purchased shares of common stock and warrants
exercisable into common stock.

   Mitsubishi Chemical Corporation. In November 1993, the Company entered into a
collaborative development agreement and a license agreement with Mitsubishi for
the development of a PRIMATIZED anti-B7 antibody. The collaborative development
agreement expired automatically on December 31, 1996.  Under the terms of the
agreements, the Company may receive payments totaling $12.2 million to fund
research of the PRIMATIZED anti-B7 antibody, subject to the attainment of
certain milestone events, of which $7.2 million has been recognized as of
December 31, 1996. Under the license agreement, which remains in effect, the
Company has granted Mitsubishi an exclusive license in Asia to make, use and
sell PRIMATIZED anti-B7 antibody products. The Company will receive royalties on
sales of the developed products by Mitsubishi. At any time, Mitsubishi may
terminate the license agreement by giving the Company 30





                                       16

<PAGE>   19
days' written notice based on a reasonable determination that the products do
not justify continued development or marketing or based on failure to reach
milestones.

   Seikagaku Corporation. In December 1994, the Company and Seikagaku entered
into a collaborative development agreement and a license agreement aimed at the
development and commercialization of therapeutic products based on the
Company's PRIMATIZED anti-CD23 antibodies. Under the terms of these agreements,
Seikagaku may provide up to $26.0 million in milestone payments and support for
research and development, subject to the attainment of certain milestone
events, of which $8.0 million has been recognized as of December 31, 1996.
Under the agreement, Seikagaku has received exclusive rights in Europe and Asia
to all products emerging from the collaboration. The Company will receive
royalties on eventual product sales by Seikagaku. At any time, Seikagaku may
terminate this agreement by giving the Company 60 days' written notice based on
a reasonable determination that the products do not justify continued
development or marketing.

   Eisai Co., Ltd. In December 1995, the Company and Eisai entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies. Under the terms of these agreements, Eisai may provide up to $37.5
million in milestone payments and support for research and development, subject
to the attainment of certain milestone events, of which $10.8 million has been
recognized as of December 31, 1996. Eisai will receive exclusive rights in Asia
and Europe to develop and market resulting products emerging from the
collaboration, with the Company receiving royalties on eventual product sales
by Eisai. At any time, Eisai may terminate this agreement by giving the Company
60 days' written notice based on a reasonable determination that the products
do not justify continued development or marketing.

   Boehringer Ingelheim International GmbH and Chugai Pharmaceutical Co., Ltd.
In January 1997, the Company and Boehringer Ingelheim International GmbH
("Boehringer Ingelheim") and in March 1996, the Company and Chugai entered into
worldwide license agreements (co-exclusive with IDEC Pharmaceuticals, Genentech
and up to one additional company) for IDEC Pharmaceuticals' proprietary gene
expression technology. As part of the agreements, Boehringer Ingelheim and
Chugai will pay license issue fees and royalties on sales of products
manufactured using the technology.


                             GOVERNMENT REGULATION

   The testing, manufacturing, labeling, 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 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 PLA and ELA, or in
certain circumstances (discussed below) a BLA, (v) FDA review of the PLA and
the ELA, or, where applicable, the BLA, and (vi) satisfactory completion of an
FDA inspection of the manufacturing facility or facilities at which the product
is made to assess compliance with 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.

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





                                       17

<PAGE>   20
   Clinical trials involve the administration of the investigational product to
healthy volunteers or patients under the supervision of a qualified principal
investigator. Further, each clinical study must be reviewed and approved by an
independent Institutional Review Board.

   Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety (adverse effects), dosage
tolerance, absorption, metabolism, distribution, excretion and
pharmacodynamics. Phase II usually involves studies in a limited patient
population to (i) evaluate preliminarily the efficacy of the drug for specific
targeted indications, (ii) determine dosage tolerance and optimal dosage and
(iii) identify possible adverse effects and safety risks. Phase III trials
generally further evaluate clinical efficacy and test further for safety within
an expanded patient population.

   In the case of products for severe or life-threatening diseases, the initial
human testing is sometimes done in patients rather than in healthy volunteers.
Since these patients are already afflicted with the target disease, it is
possible that such studies may provide evidence of efficacy traditionally
obtained in Phase II trials. These trials are frequently referred to as "Phase
I/II" trials. 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 the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a PLA/ELA or BLA requesting approval to
market the product. Before approving a PLA/ELA or BLA, the FDA will inspect the
facilities at which the product is manufactured, and will not approve the
product unless cGMP compliance is satisfactory. The FDA may deny a PLA/ELA 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/ELA 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.

   On May 14, 1996, the FDA adopted a new regulation, effective May 24, 1996,
regarding the license application process for certain biological products.
Those biological products that fall within the regulation will be reviewed on
the basis of a single BLA, rather than a PLA/ELA. The BLA includes the same
information as the current PLA, but certain of the data now required as part of
the ELA does not have to be submitted or reviewed during the approval process.
This new rule is intended, at least in part, to lessen the regulatory burden on
manufacturers of certain biologics and accelerate the approval process. The
Company believes that its products currently in clinical trials fall within the
new regulation as monoclonal antibody products for invivo use. There can be no
assurance, however, that the FDA will consider the new regulation applicable to
any of the Company's products, or that the BLA process, if applicable to the
Company's products, will have the intended effect of reducing review times.

   Additionally, in March 1996, the FDA announced a new policy intended to
accelerate the approval process for cancer therapies. Previously, cancer
therapies have been approved primarily on the basis of data regarding patient
survival rates and/or improved quality of life. Evidence of partial tumor
shrinkage, while often part of the data relied on for approval, was considered
insufficient by itself to warrant approval of a cancer therapy, except in
limited situations. Under the FDA's new policy, which became effective
immediately, the FDA has significantly broadened the circumstances in which
evidence of partial tumor shrinkage is considered sufficient for approval. This
policy is intended to make it easier to study cancer therapies and shorten the
total time for marketing approvals.

   As a general matter, data regarding partial tumor shrinkage can be developed
in less time than survival data, and it may therefore be possible under this
policy to submit a BLA (or PLA/ELA if necessary) for cancer therapies earlier
than had previously been anticipated. There can be no assurance, however, that
the FDA's new policy will be deemed to apply to IDEC-C2B8 or any of the
Company's other products, or that, if applicable, the policy will, in fact,
accelerate the approval process. Moreover, the accelerated approval process
does not necessarily increase the likelihood that any of the Company's products
will be approved by the FDA.





                                       18

<PAGE>   21
   Both before and after approval is obtained, violations of regulatory
requirements, may result in various adverse consequences including the FDA's
delay in approving or refusal to approve a product, withdrawal of an approved
product from the market and/or the imposition of criminal penalties against the
manufacturer and/or 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 product, manufacturer or license holder including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.

   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 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 foreign licensees to obtain regulatory approval for marketing its
products in foreign countries.

   Orphan Drug Designation. Under the Orphan Drug Act, the FDA may grant orphan
drug designation to drugs intended to treat a "rare disease or condition,"
which generally is a disease or condition that affects fewer than 200,000
individuals in the United States. Orphan drug designation must be requested
before submitting a PLA/ELA or BLA. After the FDA grants orphan drug
designation, the generic identity of the therapeutic agent and its potential
orphan use are publicly disclosed by the FDA. Orphan drug designation does not
convey any advantage in, or shorten the duration of, the regulatory review and
approval process. If a product which has an orphan drug designation
subsequently receives FDA approval for the indication for which it has such
designation, the product is entitled to orphan exclusivity, i.e., the FDA may
not approve any other applications to market the same drug for the same
indication, except in certain very limited circumstances, for a period of seven
years.

   In 1994, the Company obtained orphan drug designation for IDEC-C2B8,
IDEC-Y2B8, and IDEC-In2B8 from the FDA to treat low grade B-cell lymphoma.
There can be no assurance that any of these compounds will receive orphan
exclusivity for the low grade B-cell lymphoma indication, and it is possible
that competitors of the Company could obtain approval, and attendant orphan
drug exclusivity, for these same compounds for the low grade B-cell lymphoma
indication, thus precluding the Company from marketing its product(s) for the
same indication in the United States. In addition, even if the Company does
obtain orphan exclusivity for any of its compounds for low grade B-cell
lymphoma, there can be no assurance that competitors will not receive approval
of other, different drugs or biologics for low grade B-cell lymphoma. Although
obtaining FDA approval to market a product with orphan drug exclusivity can be
advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation will remain in effect in the future.



                                  COMPETITION

   The development of therapeutic agents for human disease is intensely
competitive. Many different approaches are being developed or have already been
adopted into routine use for the management of diseases targeted by the
Company. Competitive approaches to the Company's products include
radioimmunotherapies and antibody-drug and antibody-toxin conjugates for
cancers, and chemotherapeutic agents and various immunologically based agents
for cancers and autoimmune disorders. Ultimately, the Company believes that its
products will be competitive or complementary to existing products and other
products still in development. In some cases, the Company's products may be
used along with other agents in "combination therapies."

   Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in preclinical testing and human
clinical trials. These





                                       19

<PAGE>   22



companies may develop and introduce products and processes competitive with or
superior to those of the Company. The Company is aware that certain other
companies are in the process of clinical testing of potentially competitive
biotechnology-based products. If approved for the same indications for which
the Company is developing products, such products may make it more difficult
for the Company to obtain approval of its own products or reduce the potential
market shares for the Company's products.

   The Company's competition will be determined in part by the potential
indications for which the Company's antibodies are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction versus that of competitive products. Accordingly, the relative
speed with which the Company develops its products, completes the required
approval processes and generates and markets commercial product quantities are
expected to be important competitive factors. The Company expects that
competition among products approved for sale will be based, among other
factors, on product activity, safety, reliability, availability, price, patent
position and new usage and purchasing patterns established by managed care and
other group purchasing organizations.

   The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, secure sufficient capital resources to
complete product development and regulatory processes, to build a marketing and
sales organization and to build or obtain large scale manufacturing
facilities, if required beyond its facility in San Diego.


                              SALES AND MARKETING

   IDEC Pharmaceuticals has directly retained marketing or co-promotion rights
to all of its products for the United States and Canadian markets.  Within the
United States and Canada, the Company's strategy with its initial products is
to develop a sales and marketing organization targeted at the oncology and
hematology market, including co-promotion with Genentech in the United States
and with Genentech or its sublicensee in Canada.  The Company believes this
segment of the market can be satisfactorily addressed with a small,
experienced, highly trained sales force augmented with managed care
specialists.  At the appropriate time, the Company intends to develop a
similarly focused strategy for the marketing and sales of its autoimmune
products, including co-promotion with SmithKline Beecham.

   Outside of the United States and Canada, the Company's strategy is to enter
into collaborative agreements with established pharmaceutical companies as
partners for marketing, distribution and sales of its products.  In this
regard, the Company has entered into agreements with Genentech and Zenyaku for
its lymphoma products and with SmithKline Beecham, Mitsubishi, Seikagaku and
Eisai for its various humanized or PRIMATIZED antibodies.


                                   EMPLOYEES

   As of January 31, 1997, the Company employed 268 persons, including 265
full-time and three part-time employees. The Company has 213 employees in
research and development, of whom 27 hold Ph.D. or M.D. degrees. None of the
Company's employees are represented by a labor union or bound by a collective
bargaining agreement. Management believes that its overall relations with its
employees are good.

                            ENVIRONMENTAL REGULATION

   The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds.  Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by 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. The Company may incur
substantial cost to comply with environmental regulations. The Company
anticipates no material capital expenditures to be incurred for environmental
compliance in fiscal year 1997. In addition, disposal of radioactive materials
used by the Company in its research efforts may only be made at approved





                                       20

<PAGE>   23
facilities. Approval of a site in California has been delayed indefinitely. The
Company currently stores such radioactive materials on site.


                               EXECUTIVE OFFICERS

The executive officers of the Company are as follows:


<TABLE>
<CAPTION>
Name                            Age            Title
- ----                            ---            -----
<S>                             <C>    <C>
William H. Rastetter, Ph.D.      48    Chairman, President and Chief Executive Officer

Antonio J. Grillo-Lopez, M.D.    57    Senior Vice President, Medical and Regulatory Affairs

Nabil Hanna, Ph.D.               53    Senior Vice President, Research and Preclinical
                                       Development

William R. Rohn                  53    Senior Vice President, Commercial Operations         

Christopher J. Burman            47    Vice President, Manufacturing Sciences

John Geigert, Ph.D.              49    Vice President, Quality

Connie L. Matsui                 43    Vice President, Planning and Resource         
                                       Development

Phillip M. Schneider             40    Vice President and Chief Financial Officer

Kenneth J. Woolcott              38    Vice President, Secretary, General Counsel    
                                       and Licensing Executive
</TABLE>


BUSINESS EXPERIENCE

   DR. RASTETTER was appointed Chairman of the Board of Director of the Company
on May 22, 1996.  He has served as President and Chief Executive Officer of the
Company since December 1986 and Chief Financial Officer from 1988 to 1993.  Dr.
Rastetter has served as a Director of the Company since 1986.  From 1984 to
1986, he was Director of Corporate Ventures at Genentech, Inc.  From 1982 to
1984, Dr. Rastetter served in a scientific capacity at Genentech, Inc.,
directing the Biocatalysis and Chemical Sciences groups.  From 1975 to 1982, he
held various faculty positions at the Massachusetts Institute of Technology.
Dr. Rastetter serves on the Board of Directors for Argonaut Technologies, Inc.,
a privately held life science company and serves on the boards of the
California Health Care Institute and BIOCOM San Diego.  Dr.  Rastetter also
sits on the California Governor's Council on Biotechnology.  Dr. Rastetter
received his Ph.D. in chemistry from Harvard University in 1975.

   DR. GRILLO-LOPEZ joined IDEC Pharmaceuticals as Vice President, Medical and
Regulatory Affairs in November 1992 from Du Pont Merck Pharmaceutical Company.
In January 1996, he was promoted to Senior Vice President, Medical and
Regulatory Affairs.  He was employed by Du Pont Merck from 1987 to 1992, where
he most recently was Executive Medical Director for International Clinical
Research and Development and previously held various clinical and medical
director positions at the company.  From 1980 to 1987, Dr. Grillo-Lopez was a
Vice President in charge of clinical therapeutics and Director of Clinical
Oncology Research at Warner Lambert Company's Parke Davis Pharmaceutical
Research Division.  He trained as a hematologist and oncologist at the
University of Puerto Rico School of Medicine, San Juan, where he received his
medical degree and subsequently held faculty appointments.  He has been an
adjunct associate professor in the Department of Medicine (Hematology and





                                       21

<PAGE>   24



Medical Oncology) at the University of Michigan Medical School; was a founder of
the Puerto Rico Society of Hematology and the Latin American Society of
Hematology; and is a fellow of the International Society of Hematology and the
Royal Society of Medicine (London).

   DR. HANNA joined the Company in February 1990 as Vice President, Research
and Preclinical Development.  In 1993, Dr. Hanna was promoted to Senior Vice
President, Research and Preclinical Development.  From 1981 to 1990, Dr. Hanna
served as Associate Director and then Director of the Department of Immunology
at a SmithKline Beecham company focusing on autoimmune and chronic inflammatory
diseases.  From 1978 to 1981, he was a research scientist at the NCI-Frederick
Cancer Research Center, where he studied the role of immune system cells in
host defenses against cancer.  From 1973 to 1978, Dr. Hanna was a lecturer in
the Department of Immunology at the Hebrew University Medical School in Israel,
where he received his Ph.D. in immunology.

   MR. ROHN joined the Company in August 1993 as Senior Vice President,
Commercial and Corporate Development and in April 1996 he was appointed Senior
Vice President, Commercial Operations.  Prior to joining IDEC Pharmaceuticals,
Mr. Rohn was employed by Adria Laboratories from 1984, most recently as Senior
Vice President of Sales and Marketing with responsibilities for strategic and
commercial partnerships as well as all sales and marketing functions in the
United States.  Prior to Adria, Mr. Rohn held marketing and sales management
positions at Abbott Laboratories, Warren-Teed Pharmaceuticals, Miles
Laboratories and Mead Johnson Laboratories.  Mr. Rohn has a B.A. from Michigan
State University.

   MR. BURMAN joined IDEC Pharmaceuticals in May 1992 as Vice President,
Manufacturing Sciences.  He previously served from 1989 to 1992 as Director of
Manufacturing Technology at Life Sciences International.  From 1985 to 1989, he
was t-PA Operations and Technical Services Manager at Genentech, Inc., where he
was responsible for the start up of the t-PA manufacturing facility and
commercial scale manufacturing operations.  From 1967 to 1985, he held a series
of positions at Wellcome Biotech Ltd., culminating in responsibility for
worldwide cell culture-based manufacturing operations.  Mr. Burman holds a
B.Sc. degree with honors in Applied Biology from the Council for National
Academic Awards in the United Kingdom.  He also holds graduate qualifications
in Industrial Microbiology.

   DR. GEIGERT joined IDEC Pharmaceuticals in May 1996 as Vice President,
Quality.  He previously served from 1991 to 1996 as Vice President, Quality
Control at Immunex Corporation.  From 1973 to 1991, he was employed by Cetus
Corporation Laboratories where he served most recently as Director of Quality
Control and Product Evaluation. Dr. Geigert holds a B.S. degree from Washington
State University and a Ph.D. from Colorado State University.

    MS. MATSUI joined IDEC Pharmaceuticals in November 1992 as Senior Director,
Planning and Resource Development with primary responsibility for strategic
planning and human resources.  In December 1994, Ms. Matsui was promoted to
Vice President, Planning and Resource Development.  As a consultant during
1992, Ms. Matsui assisted in the planning and implementation of the Company's
unification from sites in Northern and Southern California to its present site
in San Diego.  From 1977 to 1991, she served in a variety of marketing and
general management positions at Wells Fargo Bank including Vice President and
Manager responsible for Consumer Retirement Programs and Vice President and
Manager in charge of companywide employee relations and communications.  Ms.
Matsui has a B.A. and an M.B.A. from Stanford University.

   MR. SCHNEIDER joined the Company in February 1987 as Director, Finance and
Administration and served as Senior Director, Finance and Administration from
1990 to 1991.  In 1991, he became Vice President, Finance and Administration
and in 1996 he was appointed Vice President and Chief Financial Officer.  From
1984 to 1987, Mr. Schneider served as the Manager of Financial Reporting and as
a Senior Analyst for Syntex Laboratories.  He earned his C.P.A. while working
for KPMG Peat Marwick LLP as a Senior Accountant.  Mr. Schneider earned his
M.B.A. at the University of Southern California and a B.S. in biochemistry from
the University of California at Davis.

   MR. WOOLCOTT joined IDEC Pharmaceuticals in March 1989 as Intellectual
Property Counsel.  In 1990, he became Intellectual Property and Licensing
Counsel.  Mr. Woolcott was promoted to Deputy General Counsel in 1991 and
General Counsel in 1992.  In 1993, Mr. Woolcott was appointed Secretary of the
Company.  In 1994, he was promoted to Vice President, Secretary, General
Counsel & Licensing Executive.  From 1985 to 1987, he served as Patent Counsel
and Associate Counsel at Hybritech, Inc.  From 1987 to 1989, he was engaged in
the private





                                       22

<PAGE>   25



practice of law in Seattle, Washington.  Mr. Woolcott earned his J.D. from
George Washington University and a B.S. in biochemistry from Pacific Lutheran
University.

    Executive officers are appointed to serve at the discretion of the Board
of Directors until their successors are appointed.  There are no family
relationships among executive officers of the Company.



I
TEM 2. PROPERTIES.

   IDEC Pharmaceuticals currently leases approximately 118,000 square feet of
administrative, laboratory, manufacturing and warehouse space at two locations
in San Diego, California.  The Company's principal executive offices, primary
research facilities and manufacturing plant are located 11011 Torreyana Road in
San Diego, California. This facility is leased pursuant to a 15-year operating
lease which commenced in 1993.  The Company has the option to extend the term
of the lease for two additional periods of five years each. In August 1996, the
Company entered into a 7-year operating lease for additional administrative and
warehouse space at 3030 Callan Road in San Diego, California.  The Company has
the option to extend the term of the Callan Road lease for two additional
years.



ITEM 3. LEGAL PROCEEDINGS.

   (a) The Company is not a party to any material legal proceedings.

   (b) No material legal proceedings were terminated in the fourth quarter of
1996.



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

   No matters were submitted to a vote of the Company's shareholders during the
last quarter of the year ended December 31, 1996.





                                       23

<PAGE>   26




                                    PART II


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

   (a) Market Information

   The information required by this item is contained under the caption "Common
Stock Information" in the Company's Annual Report to Shareholders for the year
ended December 31, 1996, which information is included as Exhibit 13.0 to this
Form 10-K.

   (b) Holders

   As of January 31, 1997, there were approximately 424 shareholders of record
of the Company's common stock.

   (c) Dividends

   The Company has not paid dividends since its inception.  The Company
currently intends to retain all earnings, if any, for use in the expansion of
its business and therefore does not anticipate paying any dividends in the
foreseeable future.



ITEM 6. SELECTED FINANCIAL DATA.

   The information required by this item is contained under the caption
"Selected Financial Data" in the Company's Annual Report to Shareholders for
the year ended December 31, 1996 which information is included as Exhibit 13.1 
to this Form 10-K.



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

   The information required by this item is contained under the caption
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Shareholders for the year ended
December 31, 1996, which information is included as Exhibit 13.2 to this
Form 10-K.



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

   The information required by this item is contained under the caption
"Financials" in the Company's Annual Report to Shareholders for the year ended
December 31, 1996, which information is included as Exhibit 13.3 to this
Form 10-K:

    Consolidated Balance Sheets -- December 31, 1996 and 1995
    Consolidated Statements of Operations -- Years ended December 31, 1996, 
      1995 and 1994
    Consolidated Statements of Shareholders' Equity -- Years ended December 31,
      1996, 1995 and 1994
    Consolidated Statements of Cash Flows  -- Years ended December 31, 1996, 
      1995 and 1994

    Notes to Consolidated Financial Statements
    Independent Auditors' Report



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

   None.





                                       24

<PAGE>   27




                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    The information required by this item in regards to the identification of
Directors is hereby incorporated by reference to the information contained
under the caption "Election of Directors" in the Company's Proxy Statement for
its Annual Meeting of Shareholders to be held on May 22, 1997.

    The information required by this item in regards to the identification of
Executive Officers appears under the caption "Executive Officers" appearing in

Item 1 of Part I of this report, pages 21 through 23.

    The information required by Section 16(a) is hereby incorporated by
reference to the information contained under the caption "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on May 22, 1997.


ITEM 11. EXECUTIVE COMPENSATION.

    The information required by this item is hereby incorporated by reference
to the information contained under the caption "Executive Compensation and
Related Information" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on May 22, 1997.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The information required by this item is hereby incorporated by reference
to the information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held on May 22, 1997.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required by this item is hereby incorporated by reference
to the information contained under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement for its Annual Meeting
of Shareholders to be held on May 22, 1997.


                                    PART IV

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

    a.     1) Consolidated Financial Statements:


<TABLE>
<CAPTION>
                                                                                                             Page
                                                                                                             ----
              <S>                                                                                            <C>
              Consolidated Balance Sheets--December 31, 1996 and 1995                                        *
              Consolidated Statements of Operations--Years ended December 31, 1996, 1995 and 1994            *
              Consolidated Statements of Shareholders' Equity--Years ended December 31, 1996, 1995 and 1994  *
              Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994            *
              Notes to Consolidated Financial Statements                                                     *
              Independent Auditors' Report                                                                   *
</TABLE>



              *  These items are contained under the caption "Financials" in
                 the Company's Annual Report to Shareholders for the year ended
                 December 31, 1996, which information is included as Exhibit
                 13.3 to this Form 10-K.





                                       25

<PAGE>   28



           2) Financial Statement Schedules:


<TABLE>
<CAPTION>
              SCHEDULE NUMBER              DESCRIPTION
              ---------------              -----------
                     <S>                   <C>
                     II                    Valuation and qualifying accounts
</TABLE>


                  All other financial statements schedules are omitted because
              they are not required or are not applicable, or because the
              required information is included in the financial statements or
              notes thereto.

           3) Exhibits:

                 The following exhibits are referenced or included in this
report.


<TABLE>
<CAPTION>
              EXHIBIT
              NUMBER          DESCRIPTION
              ------          -----------
              <S>             <C>
               3.1(12)        Second Amended and Restated Articles of Incorporation.
               3.2(1)         Bylaws, as amended May 15, 1992.
               4.1(7)         Certificate of Determination of Preferences of Preferred Shares filed with the 
                              California Secretary of State on March 28, 1995.  Reference is also made 
                              to Exhibit 3.1.
               4.2            Reference is made to Exhibit 3.2.
               4.6(1)         1992 Amended and Restated Registration Rights Agreement.
               4.7(1)         Specimen Common Stock Certificate.
               4.8            Reference is made to Exhibit 10.46.
               4.9(7)         1995 Registration Rights Agreements.
              10.1(13)        1988 Stock Option Plan, as Amended and Restated through January 24, 1996.
              10.2(13)        Form of Notice of Grant.
              10.3(13)        Form of Option Agreement.
              10.4(12)        Letter Agreement between the Company and Genentech, Inc., dated May 21, 1996
              10.21(1)        401(k) Plan.
              10.22(1)        Form of Indemnification Agreement for Officers and Directors.
              10.23(1)        Form of acceleration of vesting letter agreement between the Company and certain officers.
              10.24(1)y       License Agreement with Coulter Immunology, dated May 16, 1991.
              10.26(3)        Lease Agreement between the Company and Torrey Sorrento, Inc., dated July 9, 1992.
              10.27(3)y       Collaborative Research and License Agreement between the Company and 
                              SmithKline Beecham p.l.c., dated October 12, 1992.
              10.28(3)        Investment Agreement between the Company and S.R. One, Limited, dated October 16, 1992.
              10.30(8)        1995 Employee Stock Purchase Plan.
              10.31(4)y       Collaborative Development Agreement between the Company and Mitsubishi 
                              Chemical Corporation, dated November 11, 1993.
              10.32(4)        Employment Agreement between the Company and Dr. Antonio Grillo-Lopez dated 
                              September 25, 1992.
              10.33(5)y       1993 Non-Employee Directors Stock Option Plan.
              10.34(6)y       Collaborative Development Agreement between the Company and Seikagaku
                              Corporation dated December 27, 1994.
              10.35(6)y       License Agreement between the Company and Seikagaku Corporation dated 
                              December 27, 1994.
              10.36(6)y       Loan Agreement between the Company and Silicon Valley Bank and Venture 
                              Lending & Leasing, Inc., dated December 28, 1994.
              10.37(6)y       $2,500,000 Promissory Note, dated December 28, 1994.
</TABLE>






                                       26

<PAGE>   29




<TABLE>
              <S>             <C>
              10.38(6)y       $5,000,000 Promissory Note, dated December 28, 1994.
              10.39(6)        Security Agreement, dated December 28, 1994.
              10.40(6)y       Patent Collateral Assignment, dated December 28, 1994.
              10.41(6)y       Trademark Collateral Assignment, dated December 28, 1994.
              10.42(6)        Intercreditor Agreement, dated December 28, 1994.
              10.43(6)        Deed of Trust and Fixture Filing, dated December 28, 1994.
              10.44(6)        Three-Party Leasehold Agreement, dated September 30, 1994.
              10.45(6)        Warrants to Purchase Shares of Common Stock, dated December 30, 1994.
              10.46(6)        1994 Registration Rights Agreement.
              10.47(6)        Investment Agreement between the Company, SmithKline Beecham p.l.c. and 
                              SmithKline Beecham Corporation, dated December 28, 1994.
              10.48(7)        Master Definitions Agreement between the Company and Genentech. Inc.
              10.49(7)y       Collaboration Agreement between the Company and Genentech. Inc., dated March 16, 1995.
              10.50(7)y       Expression Technology Agreement between the Company and Genentech. Inc., dated March 16, 1995.
              10.51(7)        Preferred Stock Purchase Agreement between the Company and Genentech. Inc., dated March 16, 1995.
              10.52(7)        Option Agreement between the Company and Genentech, Inc., dated March 16, 1995.
              10.53(7)        Preferred and Common Stock Purchase Agreement between the Company and 
                              ML/MS Associates, L.P., dated March 16, 1995.
              10.54(9)*       Amendment Agreement between the Company and SmithKline Beecham p.l.c., dated 
                              January 20, 1993.
              10.55(9)*       Modification of the Amendment Agreement between the Company and SmithKline 
                              Beecham p.l.c., dated June 14, 1993.
              10.56(8)        Special Stock Issuance Plan.
              10.57)10)       $2,500,000 Promissory Note, dated August 11, 1995.
              10.58(10)       Warrants to purchase shares of common stock, dated August 9, 1995.
              10.59(15)y      Collaborative Development Agreement between the Company and Eisai Co., Ltd. 
                              dated December 11, 1995.
              10.60(15)y      License Agreement between the Company and Eisai Co., Ltd. dated December 11, 1995.
              10.61(15)y      License Agreement between the Company, Genentech, Inc. and Zenyaku Kogyo Co., Ltd. 
                              dated November 30, 1995.
              10.62(15)y      Development Agreement between the Company, Genentech, Inc. and Zenyaku Kogyo 
                              Co., Ltd. dated November 30, 1995.
              10.63(15)y      Supply Agreement between the Company and Zenyaku Kogyo Co., Ltd. dated 
                              November 30, 1995.
              10.64(15)y      Termination Agreement between the Company and Zenyaku Kogyo Co., Ltd. dated 
                              November 30, 1995.
              10.65(15)y      Amendment to the Development Agreement between the Company, Genentech, Inc. 
                              and Zenyaku Kogyo Co., Ltd. dated November 30, 1995.
              10.66(1)        Amendment to Collaboration Agreement between the Company and Genentech, Inc. 
                              dated November 30, 1995.
              10.67(11)y      License Agreement between the Company and Chugai Pharmaceutical Co., Ltd. 
                              dated March 31, 1996.
              10.68(14)       Lease Agreement between the Company and All Spectrum Services, Inc., dated 
                              August 13, 1996.
              13.0            Common Stock Market Information
              13.1            Selected Financial Data
              13.2            Managements' Discussion and Analysis of Financial Condition and Results of Operations
              13.3            Consolidated Financial Statements
              22.1(1)         Subsidiary of the Company.
              23.0            Independent Auditors' Report on Schedule and Consent
              23.1            Financial Statement Schedule
</TABLE>






                                       27

<PAGE>   30




<TABLE>
              <S>             <C>
              27.1            Financial Data Schedule 
</TABLE>


             --------------------------
              *               Confidential Treatment requested as to certain
                              portions of this agreement.
              y               Confidential Treatment has been granted with
                              respect to portions of this agreement.
             (1)              Incorporated by reference to exhibits of the same
                              number filed with the Registrant's Registration
                              Statement on Form S-1, File No. 33-40756.
             (2)              Incorporated by reference to exhibit of the same
                              number filed with the Registrant's Annual Report
                              on Form 10-K for the year ended December 31,
                              1991.
             (3)              Incorporated by reference to exhibits of the same
                              number filed with the Registrant's Annual Report
                              on Form 10-K for the year ended December 31,
                              1992.
             (4)              Incorporated by reference to exhibits of the
                              Registrant's Registration Statement on Form S-1, 
                              File No. 33-76080.  
             (5)              Incorporated by reference to the
                              Registrant's Registration Statement on Form S-8, 
                              File No. 33-93794.  
             (6)              Incorporated by reference to exhibit
                              of the same number filed with the Registrant's 
                              Annual Report on Form 10-K
                              for the year ended December 31, 1994.
             (7)              Incorporated by reference to exhibit of the same
                              number filed with the Registrant's Quarterly
                              Report on Form 10-Q for the quarter ended March
                              31, 1995.
             (8)              Incorporated by reference to the Registrant's
                              Registration Statement on Form S-8, File 
                              No. 33-90738.  
             (9)              Incorporated by reference to exhibit of the same
                              number filed with the Registrant's Quarterly 
                              Report on Form 10-Q for the quarter ended 
                              June 30, 1995.
             (10)             Incorporated by reference to exhibit of the same
                              number filed with the Registrant's Quarterly
                              Report on Form 10-Q for the quarter ended
                              September 30, 1995.
             (11)             Incorporated by reference to exhibit of the same
                              number filed with the Registrant's Quarterly
                              Report on Form 10-Q for the quarter ended
                              March 31, 1996.
             (12)             Incorporated by reference to the Registrant's
                              Registration Statement on Form 8-K ile 
                              No. 000-19311.
             (13)             Incorporated by reference to the Registrant's
                              Registration Statement on Form S-8, File 
                              No. 333-06543.
             (14)             Incorporated by  reference to exhibit with the
                              Registrant's Quarterly Report on Form 10-Q
                              for the quarter ended September 30, 1996.
             (15)             Incorporated by reference to exhibits of the same
                              number filed with the Registrant's Annual Report
                              on Form 10-K for the year ended December 31, 1995.


    b.     No reports on Form 8-K were filed during the fourth quarter of 1996.





                                       28

<PAGE>   31





                                   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.

                                        IDEC PHARMACEUTICALS CORPORATION


  Date: March 27, 1997            By:   /s/ William H. Rastetter
        ----------------                --------------------------------------
                                        William H. Rastetter, Ph.D., Chairman,
                                        President and Chief Executive Officer

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


<TABLE>
<CAPTION>
NAME                                  CAPACITY                                       DATE
- ----                                  --------                                       ----
<S>                                   <C>                                            <C>
/s/ William H. Rastetter              Chairman, President and                        March 27, 1997
- --------------------------------      Chief Executive Officer
William H. Rastetter, Ph.D.           (Principal Executive Officer)

/s/ Phillip M. Schneider              Vice President and Chief Financial Officer     March 27, 1997
- --------------------------------      (Principal Financial and Accounting
Phillip M. Schneider                  Officer)

/s/ Charles C. Edwards                Director                                       March 27, 1997
- --------------------------------                                                                   
Charles C. Edwards, M.D.

/s/ Alan B. Glassberg                 Director                                       March 27, 1997
- --------------------------------                                                                   
Alan B. Glassberg, M.D.

/s/ John Groom                        Director                                       March 27, 1997
- --------------------------------                                                                   
John Groom

/s/ Kazuhiro Hashimoto                Director                                       March 27, 1997
- --------------------------------                                                                   
Kazuhiro Hashimoto

/s/ Peter Barton Hutt                 Director                                       March 27, 1997
- --------------------------------                                                                   
Peter Barton Hutt

/s/ Franklin P. Johnson               Director                                       March 27, 1997
- --------------------------------                                                                   
Franklin P. Johnson, Jr.

/s/ John P. McLaughlin                Director                                       March 27, 1997
- --------------------------------                                                                   
John P. McLaughlin

/s/ Lynn Schenk                       Director                                       March 27, 1997
- --------------------------------                                                                   
The Honorable Lynn Schenk
</TABLE>






                                       29





<PAGE>   1



                                                                    Exhibit 13.0

                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY

                        COMMON STOCK MARKET INFORMATION


   The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol IDPH.  The closing price on Friday,
December 31, 1996 was $23.75 per share.  No cash dividends have been paid by
the Company on its common stock, and the Company does not anticipate the
payment of dividends in the foreseeable future.  As of December 31, 1996, there
were approximately  429 shareholders of record.  The following table sets forth
the high and low sales price for the Company's common stock as reported by the
Nasdaq National Market for the years 1996 and 1995.


<TABLE>
<CAPTION>
                                                        PRICE
                                                HIGH            LOW  
- ---------------------------------------------------------------------
<S>                                            <C>             <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter                                  $23.13          $15.88
Second Quarter                                  32.63           21.00
Third Quarter                                   27.38           13.88
Fourth Quarter                                  26.38           18.13

YEAR ENDED DECEMBER 31, 1995
First Quarter                                  $ 4.63          $ 2.13
Second Quarter                                   5.63            3.50
Third Quarter                                    8.75            5.25
Fourth Quarter                                  23.63            7.13
</TABLE>











<PAGE>   1



                                                                    Exhibit 13.1

                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY

                            SELECTED FINANCIAL DATA


The following tables set forth certain financial data with respect to IDEC
Pharmaceuticals Corporation.  The selected financial data should be read in
conjunction with the consolidated financial statements and notes thereto.


<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                1996        1995         1994         1993         1992
- ---------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
    Sales                                          $  1,505     $     --     $     --     $     --     $     --
    Contract research revenues                       14,254       12,136        5,143        4,329        3,212
    License fees                                     14,250       11,500        2,300        8,385        2,000
- ---------------------------------------------------------------------------------------------------------------
                                                     30,009       23,636        7,443       12,714        5,212

Operating expenses:
    Cost of sales                                     1,384           --           --           --           --
    Research and development                         26,763       22,488       21,191       18,723       14,519
    General and administrative                        7,298        6,112        4,768        4,262        3,196
    Acquired technology rights                           --       11,437           --           --           --
    Unification costs                                    --           --           --           --        3,000
- ---------------------------------------------------------------------------------------------------------------
                                                     35,445       40,037       25,959       22,985       20,715
- ---------------------------------------------------------------------------------------------------------------
Loss from operations                                 (5,436)     (16,401)     (18,516)     (10,271)     (15,503)

Interest income (expense), net                          481         (891)         485        1,174        2,340
Other income                                             --           --           --          215          459
- ---------------------------------------------------------------------------------------------------------------

Net loss                                             (4,955)     (17,292)     (18,031)      (8,882)     (12,704)
Convertible preferred stock dividends                  (696)          --           --           --           --
- ---------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock                $ (5,651)    $(17,292)    $(18,031)    $ (8,882)    $(12,704)
- --------------------------------------------------------------------------------------------------------------- 

Net loss per common share                          $  (0.34)    $  (1.18)    $  (1.65)    $  (0.96)    $  (1.39)
- --------------------------------------------------------------------------------------------------------------- 

Shares used in computing net loss
  per
 common share                                   16,573       14,650       10,931        9,265        9,168
- ---------------------------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
(IN THOUSANDS)                                         1996         1995         1994         1993         1992
- ---------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents and securities available-
  for-sale ($750 and $1,500 restricted at 
  December 31, 1995 and 1994, respectively)        $ 78,727     $ 24,760     $ 22,101     $ 26,503     $ 43,624
Total assets                                        113,829       47,626       45,494       50,728       52,649
Notes payable, less current portion                   5,015        6,598        7,386        3,572          156
Accumulated deficit                                 (83,815)     (78,860)     (61,568)     (43,537)     (34,655)
Total shareholders' equity                         $ 92,614     $ 31,169     $ 27,896     $ 35,674     $ 43,787
</TABLE>









<PAGE>   1



                                                                    Exhibit 13.2

                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY


          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


   The following discussion should be read in conjunction with the consolidated
financial statements and related notes of IDEC Pharmaceuticals Corporation
("IDEC Pharmaceuticals" or the "Company").

OVERVIEW

   IDEC Pharmaceuticals Corporation is primarily engaged in the research and
development of targeted therapies  for the treatment of cancer and autoimmune
and inflammatory diseases.  To date, the Company has not received any revenues
from the commercial sale of its products.  The Company has funded its
operations primarily through the sale of equity securities as well as through
contract research and license fee revenues received in connection with
collaborative arrangements entered into with the Company's strategic partners.

   The Company has incurred increasing annual operating expenses and, as the
Company prepares for product commercialization, it expects such trends to
continue. The Company has incurred annual operating losses since its inception
in 1985, and anticipates that such operating losses will continue for at
 least
the next one to two years.  As of December 31, 1996, the Company had an
accumulated deficit of $83.8 million.

RESULTS OF OPERATIONS

   Contract Research Revenues:  Contract research revenues increased to $14.3
million in 1996, from $12.1 million in 1995 and $5.1 million in 1994.  The
increase in contract research revenues in 1996 is due primarily to revenue from
a new collaboration entered into with Eisai Co., Ltd. ("Eisai") in December
1995 and ongoing efforts under existing collaborative agreements with
Genentech, Inc. ("Genentech") and Seikagaku Corporation ("Seikagaku"), offset
by decreased revenues from SmithKline Beecham, p.l.c. ("SmithKline Beecham") as
a result of the planned transfer of late stage clinical development of
IDEC-CE9.1 to SmithKline Beecham in late 1995.  The increase in contract
research revenues in 1995 from 1994 was primarily a result of the new
collaborations entered into with Genentech and Eisai and ongoing efforts under
a collaborative agreement entered into with Seikagaku in December 1994.

   License Fees:  License fees totaled $14.3 million in 1996, compared to $11.5
million in 1995 and $2.3 million in 1994.  License fees in 1996 include $4.5
million received for the license to Chugai Pharmaceutical Co., Ltd. of the
Company's proprietary gene expression technology for the manufacture of
recombinant proteins, $4.0 million received from SmithKline Beecham for the
initiation of a Phase III trial by SmithKline Beecham of IDEC-CE9.1 for the
treatment of rheumatoid arthritis, $4.0 million from Genentech for the
expansion of its collaboration with the Company to include two radioconjugates,
IDEC-Y2B8 and IDEC-In2B8 and for the achievement of a development milestone
event for IDEC-C2B8 and license fee revenues received from Seikagaku and Eisai
also for the achievement of product development milestone events.  License fees
increased in 1995 from 1994 due to one-time licensing fees earned from the new
corporate partnerships with Genentech, Eisai and Seikagaku in addition to the
licensing fees recognized from Zenyaku  Kogyo Co., Ltd. for the development and
marketing rights for IDEC-C2B8 in Japan.  License fee revenues can vary
significantly from year to year based upon the consummation of new corporate
alliances and the achievement of milestone events. The Company continues to
pursue other collaborative and license arrangements; however, no assurance can
be given that discussions in this regard will result in any such arrangements
or that the Company will receive significant revenues from any such
collaborative or license arrangements.

   Sales and Cost of Sales:  Sales and costs of sales in 1996 were a result of
the Company completing a contract manufacturing arrangement during the second
quarter of 1996.






<PAGE>   2




   Research and Development:   Research and development costs increased to
$26.8 million in 1996, from $22.5 million in 1995 and $21.2 million in 1994.
The increase in research and development expenses in 1996 is primarily due to a
$1.3 million expense for access to certain patent rights related to IDEC-C2B8,
increased personnel costs related to the completion of the Phase III trial,
preparation of the Biologics License Application and the preparation for
building of commercial inventory of the Company's lead product candidate,
IDEC-C2B8.  The increase in research and development costs in 1995 from 1994
was due primarily to higher personnel and related costs and license fee
payments to acquire certain know-how, technology and patent rights to develop,
produce and market products.  The Company expects to continue incurring
substantial additional research and development costs in the future, due to
expansion of research and development programs; patent- and regulatory-related
costs; preclinical and clinical testing of the Company's various products under
development; production scale-up and manufacturing of products used in clinical
trials; and pre-commercialization-related manufacturing costs.

   General and Administrative:  General and administrative costs increased to
$7.3 million in 1996, from $6.1 million in 1995 and $4.8 million in 1994.
General and administrative expenses increased in 1996 due to higher personnel
costs to support expanded manufacturing operations, completion of the Phase III
trial and preparation of the Biologics License Applications for IDEC-C2B8.  The
increase in general and administrative costs in 1995 from 1994 is due primarily
to costs associated with structuring the Genentech collaboration, increased
patent filing fees and higher personnel and related costs.  General and
administrative costs necessary to support expanded manufacturing capacity,
expanded clinical trials, research and development and the creation of a
marketing and sales organization are expected to increase in the foreseeable
future.

   Acquired Technology Rights:  In March 1995, the Company issued 1.0 million
shares of its common stock and 69,375 shares of its 10 percent Series B
Nonvoting Cumulative Convertible Preferred Stock for the repurchase of all
Merrill Lynch/Morgan Stanley, L.P. rights in the Company's lymphoma products.
In the first quarter of 1995, the Company recorded a non-cash charge of $11.4
million, representing the purchase of the acquired technology rights.

   Interest Income and Expense:  Net interest income for the year ended
December 31, 1996 was $0.5 million compared to net interest expense of $0.9
million in 1995 and net interest income of $0.5 million in 1994. The increase
in net interest income in 1996 from net interest expense in 1995 is due to
higher balances in cash, cash equivalents and securities available-for-sale,
offset by an increase in interest expense resulting from increases in notes
payable used to finance certain capital purchases and an increase in non-cash
interest charges for certain common stock warrants issued in connection with
certain debt financings.  Net interest expense in 1995 was the result of higher
balances in notes payable, non-cash interest charges for certain common stock
warrants, partially offset by increased interest earnings on cash, cash
equivalents and securities available-for-sale.

   Income Taxes:  IDEC Pharmaceuticals has incurred losses on an annualized
basis since inception; therefore, no provision for income taxes has been
recorded.  The Company's net operating loss carryforwards available to offset
future taxable income are approximately $66.3 million for federal income tax
purposes and expire between 1999 and 2011.  The future utilization of net
operating loss carryforwards may be limited under the Internal Revenue Code
("IRC") due to an IRC defined ownership change that occurred during 1991.
However, the Company believes that such limitations will not have a material
impact upon the utilization of the net operating loss carryforwards.

   New Accounting Standards: Effective January 1, 1996, the Company adopted
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the disclosure requirements of Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation", neither of which
had a material effect on the Company's consolidated financial statements for
the year ended December 31, 1996.


LIQUIDITY AND CAPITAL RESOURCES

   The Company has financed its operations and capital expenditures since
inception principally through the sale of equity securities, license fees,
contract research revenues, lease financing transactions and interest income.
The Company expects to finance its current and planned operating requirements
principally through cash on hand and with funds from existing collaborative
agreements and contracts which the Company believes will be sufficient to meet
its near-term operating requirements.  Existing agreements and contracts,
however, could be canceled by the






<PAGE>   3



contracting parties.  In addition, the Company may pursue additional capital
through a combination of new collaborative agreements, strategic alliances and
equity and debt financings.  However, no assurance can be provided that
additional capital will be obtained through these sources on favorable terms or
at all.  Should the Company not enter into any such arrangements, the Company
anticipates its cash, cash equivalents and securities available-for-sale,
together with the existing agreements and contracts, will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures through early commercialization of its first product.  If adequate
funds are not available from additional sources of financing, the Company's
business could be adversely affected.

   The Company's working capital and capital requirements will depend upon
numerous factors, including the progress of the Company's preclinical and
clinical testing; manufacturing; research and development programs; timing and
cost of obtaining regulatory approvals; levels of resources that the Company
devotes to the development of manufacturing and marketing capabilities;
technological advances; status of competitors; and the ability of the Company
to establish collaborative arrangements with other organizations.

   Until required for operations, the Company's policy under established
guidelines is to keep its cash reserves in bank deposits, certificates of
deposit, commercial paper, corporate notes, United States government
instruments and other readily marketable debt instruments, all of which are
investment-grade quality.

   At December 31, 1996, the Company had $78.7 million in cash, cash
equivalents, and securities available-for-sale compared to cash, cash
equivalents, and securities available-for-sale of $24.8 million at December 31,
1995, of which $0.8 million was restricted at December 31, 1995.  Sources of
cash, cash equivalents and securities available-for-sale during the year ended
December 31, 1996 include $12.5 million from the issuance of convertible
preferred stock, $52.6 million from the issuance of common stock (including
approximately $4.8 million from the exercise of common stock warrants and $1.3
million from the exercise of stock options and from common stock issued under
an employee stock purchase plan) and $2.5 million from funding under a lease
line.  Uses of cash, cash equivalents and securities available-for-sale during
the year ended December 31, 1996, include $3.8 million used in operations, $6.3
million used for leasehold improvements for clinical manufacturing, additional
office and warehouse facilities and to purchase capital equipment and $3.4
million used to pay notes payable.

   In June 1996, the Company completed a public offering of 2.1 million shares
of its common stock resulting in net proceeds of approximately $46.3 million.
In May 1996, the Company issued 100,000 shares of its Series A-6 Convertible
Preferred Stock and in March 1996, the Company issued 23,000 shares of its
Series A-3 Convertible Preferred Stock pursuant to terms of a preferred stock
purchase agreement with Genentech resulting in proceeds of $12.5 million.

   In August 1995, the Company completed funding under a $10.0 million lease
financing agreement to finance both equipment and facility improvements.  Terms
of the financing agreement require final principal payments of $1.1 million and
$0.4 million in July 1998 and January 1999, respectively.

   This annual report contains predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties.  While this
outlook represents our current judgment on the future direction of the
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested above.  The Company undertakes
no obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances arising after the
date hereof other than required by the Securities and Exchange Act of 1934.








<PAGE>   1



                                                                    Exhibit 13.3

                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY

                       CONSOLIDATED FINANCIAL STATEMENTS

IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Balance Sheets
(In thousands)


<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                                  1996            1995
- ------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                   $ 25,337        $ 18,828
  Securities available-for-sale                                                 53,390           5,182
  Current portion of note receivable                                               804             640
  Contract research revenue receivables                                          3,635           1,455
  Due from related party                                                         1,532              --
  Inventories                                                                    4,384              --
  Prepaid expenses and other current assets                                      2,533           1,333
- ------------------------------------------------------------------------------------------------------
         Total current  assets                                                  91,615          27,438

Restricted marketable security                                                      --             750
Property and equipment, net                                                     21,453          17,955
Note receivable, less current portion                                              445           1,249
Deposits and other assets                                                          316             234
- ------------------------------------------------------------------------------------------------------
                                                                              $113,829        $ 47,626
- ------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of notes payable                                            $  3,830        $  3,248
  Trade payable - clinical materials                                                --             238
  Accounts payable                                                               3,106             970
  Accrued expenses                                                               6,751           4,280
- ------------------------------------------------------------------------------------------------------
         Total current liabilities                                              13,687           8,736
- ------------------------------------------------------------------------------------------------------

Notes payable, less current portion                                              5,015           6,598

Deferred rent                                                                    1,513           1,123
Due to related party                                                             1,000              --
Commitments

Shareholders' equity:
  Convertible preferred stock, no par value, 8,000 shares
    authorized; 330 shares and 207 shares issued
 and outstanding at
     December 31, 1996 and 1995, respectively, at liquidation value             26,586          14,086
  Common stock, no par value, 50,000 shares authorized;
    18,059 shares and 15,061 shares issued and outstanding
    at December 31, 1996 and 1995, respectively                                148,597          93,554
  Additional paid-in capital                                                     1,283           2,379
  Unrealized gains (losses) on securities available-for-sale                       (37)             10
  Accumulated deficit                                                          (83,815)        (78,860)
- ------------------------------------------------------------------------------------------------------
         Total shareholders' equity                                             92,614          31,169
- ------------------------------------------------------------------------------------------------------
                                                                              $113,829        $ 47,626
- ------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.






<PAGE>   2




IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Statements of Operations
(In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                        1996          1995          1994
- --------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>           <C>
- --------------------------------------------------------------------------------------------------------
Revenues:
  Sales                                                              $ 1,505      $     --      $     --
  Contract research revenues                                          14,254        12,136         5,143
  License fees                                                        14,250        11,500         2,300
- --------------------------------------------------------------------------------------------------------
    Total revenues (including related party revenues of
      $5,500 and $8,583 in 1996 and 1995, respectively)               30,009        23,636         7,443

Operating expenses:
  Cost of sales                                                        1,384            --            --
  Research and development                                            26,763        22,488        21,191
  General and administrative                                           7,298         6,112         4,768
  Acquired technology rights                                              --        11,437            --
- --------------------------------------------------------------------------------------------------------
    Total operating expenses                                          35,445        40,037        25,959
- --------------------------------------------------------------------------------------------------------
Loss from operations                                                  (5,436)      (16,401)      (18,516)
- --------------------------------------------------------------------------------------------------------
Interest income (expense):
  Interest income                                                      3,178         1,387           956
  Interest expense                                                    (2,697)       (2,278)         (471)
- --------------------------------------------------------------------------------------------------------
    Net interest income (expense)                                        481          (891)          485
- --------------------------------------------------------------------------------------------------------
Net loss                                                              (4,955)      (17,292)      (18,031)

Convertible preferred stock dividends                                   (696)           --            --
- --------------------------------------------------------------------------------------------------------
Net loss applicable to common stock                                  $(5,651)     $(17,292)     $(18,031)
- --------------------------------------------------------------------------------------------------------
Net loss per common share                                            $ (0.34)     $  (1.18)     $  (1.65)
Shares used in computing net loss per common share                    16,573        14,650        10,931
- --------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.






<PAGE>   3
IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
(In thousands)


<TABLE>
<CAPTION>
                                 Convertible                         
                                preferred stock    Common stock     Additional     Unrealized gains                       Total
                                ---------------  ----------------    paid-in    (losses) on securities   Accumulated   shareholders'
                                Shares  Amount   Shares    Amount    capital     available-for-sale        deficit        equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>    <C>      <C>      <C>         <C>                <C>               <C>            <C>
Balance at December 31, 1993    --    $  --     9,425   $ 77,512    $1,699              $--               $(43,537)      $ 35,674

Issuance of common stock
  under stock option plan       --       --        24         26        --               --                      --            26
Issuance of common stock 
  under employee stock
  purchase plan                 --       --        38         85        --               --                      --            85  
Issuance of common stock
  in stock offerings            --       --     4,241     10,156        --               --                      --        10,156  
Change in unrealized gains
  (losses) on securities 
  available-for-sale            --       --        --         --        --              (14)                     --           (14)
Net loss                        --       --        --         --        --               --                 (18,031)      (18,031)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994    --       --    13,728     87,779     1,699              (14)                (61,568)       27,896
Issuance of common stock
  under stock option plans      --       --       167        697        --               --                      --           697  
Issuance of common stock
  under employee stock
  purchase plan                 --       --        63        256        --               --                      --           256  
Issuance of series A-1 and
  A-2 convertible preferred
  stock pursuant to terms of
  a collaborative agreement    138    7,149        --         --        --               --                      --         7,149
Issuance of common stock
  and series B convertible
  preferred stock to acquire
  technology rights             69    6,937     1,000      4,500        --               --                      --        11,437  
Issuance of common stock for
  services                      --       --       103        322        --               --                      --           322  
Amortization of fair value
  change in common stock
  warrants                      --       --        --         --       680               --                      --           680  
Change in unrealized gains
  (losses) on securities
  available-for-sale            --       --        --         --        --               24                      --            24
Net loss                        --       --        --         --        --               --                 (17,292)      (17,292)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995   201   14,086    15,061     93,554     2,379               10                 (78,860)       31,169  
Issuance of common stock 
  under stock option plans        --         --      182        459        --                --                 --            459
Issuance of common stock 
  under employee stock 
  purchase plan                   --         --      160        845        --                --                 --            845
Issuance of common stock 
  in public offering              --         --    2,070     46,277        --                --                 --         46,277
Issuance of common stock 
  for services                    --         --       17        359        --                --                 --            359
Issuance of common stock 
  from exercise of stock
  warrants                        --         --      569      7,103    (2,348)               --                 --          4,755
Issuance of series A-3 and 
  series A-6 convertible
  preferred stock pursuant 
  to terms of a collaborative 
  agreement                      123     12,500       --         --        --                --                 --         12,500
Amortization of fair value
  change in common stock
  warrants                        --         --       --         --     1,252                --                 --          1,252
Change in unrealized gains 
  (losses) on securities 
  available-for-sale              --         --       --         --        --               (47)                --            (47)
Net loss                          --         --       --         --        --                --             (4,955)        (4,955)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996     330    $26,586   18,059   $148,597    $1,283               (37)          $(83,815)       $92,614
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.






<PAGE>   4



IDEC Pharmaceuticals Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)



<TABLE>
<CAPTION>
                                                                                     Years ended December 31,
                                                                              1996             1995             1994
- --------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>              <C>
Cash flows from operating activities:
    Net loss                                                              $ (4,955)        $(17,292)        $(18,031)
    Adjustments to reconcile net loss to net
     cash used in operating activities:
      Depreciation and amortization                                          2,643            2,401            2,422
      Deferred rent                                                            390              450              425
      Other non-cash expenses                                                 (104)              --               --
      Gains (losses) on sales of securities available-for-sale                  --                5               (1)
      Acquired technology rights                                                --           11,437               --
      Issuance of common stock for services                                    359              322               --
      Amortization of fair value change in common stock warrants             1,252              680               --
      Change in assets and liabilities:
         Inventories                                                        (4,384)              --               --
         Prepaid expenses, deposits and other assets                        (4,994)            (713)            (268)
         Note receivable                                                       640              495              562
         Accounts payable, accrued expenses and other liabilities            5,608            2,193             (740)
         Trade payable - clinical materials                                   (238)            (543)          (3,506)
         Deferred contract research revenue                                     --           (2,024)              --
- --------------------------------------------------------------------------------------------------------------------
           Net cash used in operating activities                            (3,783)          (2,589)         (19,137)
- --------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
    Purchase of property and equipment                                      (6,301)          (1,315)          (1,619)
    Purchase of marketable securities and securities available-for-sale    (72,771)          (8,218)          (6,551)
    Sales and maturities of marketable securities and
     securities available-for-sale                                          25,265           10,715           14,962
- --------------------------------------------------------------------------------------------------------------------
           Net cash provided by (used in) investing activities             (53,807)           1,182            6,792
- --------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
    Proceeds from notes payable                                              2,475            2,500            7,500
    Payments on notes payable                                               (3,440)          (4,058)          (1,400)
    Proceeds from issuance of common stock, net                             52,564              953           10,267
    Proceeds from issuance of convertible preferred stock, net              12,500            7,149               --
- --------------------------------------------------------------------------------------------------------------------
           Net cash provided by financing activities                        64,099            6,544           16,367
- --------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                    6,509            5,137            4,022
Cash and cash equivalents, beginning of year                                18,828           13,691            9,669
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                    $ 25,337         $ 18,828         $ 13,691
- --------------------------------------------------------------------------------------------------------------------

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest                                $  1,469         $  1,518         $    466

- --------------------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.






<PAGE>   5




IDEC Pharmaceuticals Corporation and Subsidiary
Notes to Consolidated Financial Statements


NOTE 1:    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Organization and Business:  IDEC Pharmaceuticals Corporation (the "Company")
was incorporated on July 19, 1985, under the laws of the State of California to
engage in the research and development of targeted therapies for the treatment
of cancer and autoimmune and inflammatory diseases.

   Principles of Consolidation:  The consolidated financial statements include
the financial statements of IDEC Pharmaceuticals Corporation and its wholly
owned subsidiary IDEC Seiyaku.  All significant intercompany balances and
transactions have been eliminated in consolidation.

   Cash and Cash Equivalents:  For the purposes of financial statement
presentation, the Company considers all highly liquid investments in debt
securities with original maturities of three months or less to be cash
equivalents.

   Securities Available-for-Sale:  Securities available-for-sale are carried at
fair value, with unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity.  The cost of securities sold is
based on the specific identification method.

   Inventories:  Inventories, which consist primarily of finished goods, are
stated at the lower of cost or market.  Cost is determined in a manner which
approximates the first-in, first-out (FIFO) method.

   Property and Equipment:  Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years.  Amortization of leasehold improvements is calculated
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets.

   Fair Value of Financial Instruments:  The carrying amount of cash, cash
equivalents and securities available-for-sale, note receivable, contract
research revenue receivables, due from related party, accounts payable, accrued
expenses, trade payable - clinical materials and notes payable are considered
to be representative of their respective fair values because of the short-term
nature of those investments.  A reasonable estimate of fair value is not
practicable for the liability, due to related party, at December 31, 1996, due
to the inherent difficulty of evaluating the timing of the payments.

   Research and Development Costs:  All research and development costs are
expensed in the period incurred.  Clinical grant costs are fully accrued upon
patient enrollment.

   Contract Research Revenues and License Fees:  Contract research revenues are
recognized at the time research and development activities are performed under
the terms of the research contracts.  Contract research revenue earned in
excess of contract payments received is classified as contract research revenue
receivables.  License fees include milestone payments and non-refundable fees
from the sale of product rights under agreements with third parties.  Revenues
from milestone payments are recognized when the results or events stipulated in
the agreement have been achieved.

   Stock Based Compensation:   Effective January 1, 1996, the Company adopted
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123").  Statement No. 123 allows
companies to expand the use of fair value accounting for stock compensation
plans or requires companies that elect to retain the current approach for
recognizing stock-based compensation expense under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), to make annual pro forma disclosures of the Company's operating results
as if they had adopted the fair value method.  Management of the Company has
retained the approach under APB Opinion No. 25 for recognizing stock-based
compensation.

   Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of:
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of






<PAGE>   6



Long-Lived Assets and for Long Lived Assets to be Disposed Of" ("Statement No.
121").  Statement No. 121 requires losses from impairment to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets
before interest are less than the assets' carrying amount.  The adoption of
Statement No. 121 did not have a material effect on the Company's consolidated
financial statements for the year ended December 31, 1996.

   Income Taxes:  Income taxes are accounted for under the asset and liability
method where deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carryforwards.  Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled.  The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.

   Net Loss Per Common Share:  Computations of net loss per common share use
the weighted average number of common shares outstanding.  Common equivalent
shares from common stock options, warrants and convertible preferred stock are
excluded from the computations as their effect is anti-dilutive.  Net loss is
reduced by convertible preferred stock dividend requirements in calculating net
loss applicable to common stock.

   Use of Estimates:  Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during
the reporting periods to prepare these consolidated financial statements in
conformity with generally accepted accounting principles.  Actual results could
differ from these estimates.

   Reclassifications:  Certain balances in 1995 and 1994 have been reclassified
to conform with the presentation in 1996.

NOTE 2:    SECURITIES AVAILABLE-FOR-SALE

   Securities available-for-sale at December 31, 1996 and 1995 consist of the
following (tables in thousands):


<TABLE>
<CAPTION>
                                                                 1996                                
                                        -----------------------------------------------------
                                                           Gross        Gross
                                         Amortized       unrealized   unrealized       Market
                                           costs           gains        losses         value 
- ---------------------------------------------------------------------------------------------
<S>                                      <C>             <C>          <C>             <C>
Corporate securities                     $  40,227       $    3       $   (38)        $40,192
Commercial paper                             9,979           --            --           9,979
Certificate of deposits                      1,499           --            --           1,499
U.S. government agencies                     1,722           --            (2)          1,720
- ---------------------------------------------------------------------------------------------
                                         $  53,427       $    3       $   (40)        $53,390
- ---------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
                                                                 1995                                
                                        -----------------------------------------------------
                                                          Gross         Gross     
                                         Amortized      unrealized    unrealized       Market
                                           costs          gains         losses         value 
- ---------------------------------------------------------------------------------------------
<S>                                     <C>             <C>           <C>             <C>
Corporate securities                    $    2,828      $     1       $    --        $  2,829
U.S. government agencies                     2,344            9            --           2,353
- ---------------------------------------------------------------------------------------------
                                        $    5,172      $    10       $    --        $  5,182
- ---------------------------------------------------------------------------------------------
</TABLE>


   The net unrealized holding gain (loss) on securities available-for-sale
included as a separate component of shareholders' equity at December 31, 1996
and 1995 totaled $(37,000) and $10,000, respectively.  The gross realized gains
on sales of securities available-for-sale for the year ended December 31, 1995
totaled $4,000 and the gross realized losses for the year ended December 31,
1995 totaled  $9,000.






<PAGE>   7



   The amortized cost and estimated fair value of securities available-for-sale
at December 31, 1996, by contractual maturity are shown below (table in
thousands):


<TABLE>
<CAPTION>
                                                                               Amortized          Estimated
                                                                                  Cost            Fair Value
- ------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                <C>
Due in one year or less                                                       $   47,704         $    47,667
Due after one year through two years                                               5,723               5,723
- ------------------------------------------------------------------------------------------------------------
                                                                              $   53,427         $    53,390
- ------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 3:    PROPERTY AND EQUIPMENT

   Property and equipment at December 31, 1996 and 1995 consists of the
following (table in thousands):


<TABLE>
<CAPTION>
                                                                                     1996               1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>
Furniture and fixtures                                                           $  1,158          $     608
Machinery and equipment                                                            11,061              8,153
Leasehold improvements                                                             16,359             15,639
                                                                                                            
Construction in progress                                                            1,480                 --
- ------------------------------------------------------------------------------------------------------------
                                                                                   30,058             24,400
Accumulated depreciation and amortization                                          (8,605)            (6,445)
- ------------------------------------------------------------------------------------------------------------ 
                                                                                  $21,453            $17,955
- ------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 4:    NOTE RECEIVABLE

   In November 1992, the Company loaned $3,200,000 to the landlord of its
headquarters in San Diego, California, to assist in financing construction of
leasehold improvements.  The promissory note bears interest at 8.75 percent and
matures in January 2000.  Interest and principal payments are due monthly and
are paid from the landlord's rents received from the Company (Note 10).

NOTE 5:    NOTES PAYABLE

   Notes payable at December 31, 1996 and 1995, consist of the following (table
in thousands):


<TABLE>
<CAPTION>
                                                                                     1996               1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>
17.53% note, due in monthly installments with a final payment of $375
   due at maturity in 1999, secured by equipment, lease deed of trust, 
   and a patent and trademark collateral assignment                               $ 1,745            $ 2,245
17.74% note, due in monthly installments with a final payment of $375
   due at maturity in 1998, secured by equipment, lease deed of trust, 
   and a patent and trademark collateral assignment                                 1,355              1,919
Prime plus 1% note, due in monthly installments with a final payment of $750
   due at maturity in 1998, secured by equipment, lease deed of trust, 
   and a patent and trademark collateral assignment                                 2,710              3,839
10.18% note, due in monthly installments, maturing 1997, secured by equipment         710              1,413
 9.32% to 10.62% capital lease obligations, due in monthly installments,
   maturing 2000                                                                    2,263                 --
Other notes, due in monthly installments, maturing thru 1997, secured by equipment     62                430
- ------------------------------------------------------------------------------------------------------------
                                                                                    8,845              9,846

Current portion                                                                    (3,830)            (3,248)
- ------------------------------------------------------------------------------------------------------------
                                                                                  $ 5,015            $ 6,598
- ------------------------------------------------------------------------------------------------------------
</TABLE>


   Machinery and equipment recorded under capital leases was $2,151,000, net of
accumulated depreciation of  $547,000 at December 31, 1996.

   The aggregate maturities of notes payable for each of the four years
subsequent to December 31, 1996, are as






<PAGE>   8



follows: 1997, $3,830,000; 1998, $3,242,000; 1999, $980,000; and 2000,
$793,000.

NOTE 6:    401(K) EMPLOYEE SAVINGS PLAN

   The Company has a qualified 401(k) Employee Savings Plan ("401(k) Plan"),
available to substantially all employees over the age of 21.  The Company may
make discretionary contributions to the 401(k) Plan, which vest immediately.
There were no discretionary contributions for the years ended December 31,
1996, 1995 and 1994.

NOTE 7:    RESEARCH AND DEVELOPMENT

   In December 1995, the Company and Eisai Co. Ltd. ("Eisai") entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies.  Under the terms of these agreements, Eisai may provide up to
$37,500,000 in milestone payments and support for research and development.
Eisai will receive exclusive rights in Asia and Europe to develop and market
resulting products emerging from the collaboration, with the Company receiving
royalties on eventual product sales by Eisai.  Eisai may terminate these
agreements based on a reasonable determination that the products do not justify
continued development or marketing.  Included in contract research revenues for
1996 and 1995 is $5,500,000 and $2,500,000, respectively, to fund product
development, which approximates the research and development costs incurred
under the program.  In 1996 and 1995, the Company recognized $750,000 and
$2,000,000, respectively, in license fees under these agreements.

   In December 1994, the Company and Seikagaku Corporation ("Seikagaku")
entered into a collaborative development agreement and a license agreement
aimed at the development and commercialization of a PRIMATIZED anti-CD23
antibody.  Under the terms of these agreements, Seikagaku may provide up to
$26,000,000 in milestone payments and support for research and development. The
Company and Seikagaku will share co- exclusive, worldwide rights to all
products emerging from the collaboration, with the Company receiving royalties
on eventual product sales by Seikagaku.  Seikagaku may terminate these
agreements based on a reasonable determination that the products do not justify
continued development or marketing.  Included in contract research revenues for
1996 and 1995 is $3,500,000 and $2,500,000, respectively, to fund product
development, which approximates the research and development costs incurred
under the program.  In 1996 and 1995, the Company recognized $1,000,000 in
license fees under these agreements for each of the respective years.

   In November 1993, the Company entered into a collaborative development
agreement and a license agreement with Mitsubishi Chemical Corporation
("Mitsubishi Chemical"), for the development of a PRIMATIZED anti-B7 antibody.
Under the terms of the collaboration, Mitsubishi may provide up to $12,000,000
in milestone payments and support for research and development.  The Company
will be reimbursed for its research efforts, receive milestone payments, retain
certain marketing rights and receive royalties on sales of any products
commercialized by Mitsubishi Chemical.  Mitsubishi Chemical may terminate this
agreement if certain development objectives are not attained.  The development
agreement with Mitsubishi expired on December 31, 1996.  Included in contract
research revenues for 1996, 1995 and 1994 is $2,000,000, $2,047,000 and
$1,500,000, respectively, to fund product development, which approximates the
research and development costs incurred under the program.  Included in license
fees are milestone and licensing payments of $1,000,000 and $300,000 for 1995
and 1994, respectively, earned under these agreements.

   In October 1992, the Company and SmithKline Beecham p.l.c. ("SmithKline
Beecham") entered into a collaborative research and license agreement aimed at
the development and commercialization of therapeutic products based on the
Company's PRIMATIZED anti-CD4 antibodies.  Under the terms of the agreement,
the Company will receive aggregate payments that have the potential of reaching
in excess of $60,000,000, subject to the attainment of certain milestones.  The
Company will receive funding for anti-CD4 related research and development
programs, royalties and a share of co-promotion profits (in North America) on
sales of products which may be commercialized as a result of the agreement.
SmithKline Beecham may terminate this agreement based on a reasonable
determination that the products do not justify continued development or
marketing.  Included in contract research revenues for 1995 and 1994 is
$3,488,000 and $3,201,000, respectively, to fund product development, which
approximates the research and development costs incurred under the program.
Included in license fees are milestone and licensing payments of $4,000,000 and
$2,000,000 for 1996 and 1994, respectively, earned under these agreements.






<PAGE>   9



   The Company performed research under certain other contracts and,
accordingly, realized revenues and recognized expenses in the accompanying
consolidated statements of operations.

   Related Party Arrangements:  In March 1995, the Company and Genentech, Inc.
("Genentech") entered into a collaborative agreement for the clinical
development and commercialization of the Company's anti-CD20 monoclonal
antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas. In
February 1996, the parties extended this collaboration to include two
radioconjugates, IDEC-Y2B8 and IDEC-In2B8, also for the treatment of B-cell
lymphomas.  Concurrent with the collaborative agreement the Company and
Genentech also entered into an expression technology license agreement for a
proprietary gene expression technology developed by the Company and a preferred
stock purchase agreement providing for certain equity investments in the
Company by Genentech (Note 8).  Under the terms of these agreements, the
Company may receive payments totaling $57,000,000, subject to the attainment of
certain milestone events.  In addition, the Company and Genentech will
co-promote IDEC-C2B8 and IDEC-Y2B8 in the United States and the Company and
Genentech's sublicensee will co-promote IDEC-C2B8 in Canada, with the Company
receiving a share of profits.  Under the terms of separate agreements with
Genentech, commercialization of IDEC-C2B8 outside the United States will be the
responsibility of F. Hoffmann-La Roche Ltd, one of the world's largest
pharmaceuticals firms, except in Japan where Zenyaku Kogyo Co., Ltd.
("Zenyaku") will be responsible for development, marketing and sales.  The
Company will receive royalties on sales outside the U.S.  and Canada.
Additionally, the Company will receive royalties on sales of Genentech products
manufactured using the Company's proprietary gene expression system.  Genentech
may terminate this agreement for any reason beginning on the date of
availability of data from the first Phase III clinical trial of IDEC-C2B8.
Included in inventory at December 31, 1996, is $4,018,000 in finished goods
inventory that will be sold to Genentech.  Included in contract research
revenues for 1996 and 1995 is $1,500,000 and $1,083,000, respectively, to fund
specific product development, which approximates the research and development
costs incurred under the program.  In 1996 and 1995, the Company recognized
$4,000,000 and $5,500,000, respectively, in license fees under these
agreements.

   In June 1991, the Company and Zenyaku entered into a product rights
agreement and a stock purchase agreement under which the Company granted
Zenyaku a license to manufacture, use and sell certain products for cancer and
autoimmune therapeutic applications.  In November 1995, the Company and Zenyaku
terminated the product rights agreement and concurrently the Company, Zenyaku
and Genentech entered into a joint development, supply and license agreement
where Zenyaku received exclusive rights to develop, market and sell IDEC-C2B8
in Japan which resulted in the Company recognizing $2,000,000 in license fees
from Zenyaku.

NOTE 8:    SHAREHOLDERS' EQUITY

   Convertible Preferred Stock:  In March 1995, the Company issued 1,000,000
shares of its common stock and 69,375 shares of its 10 percent Series B
Nonvoting Cumulative Convertible Preferred Stock ("Series B Preferred Stock")
for the repurchase of all Merrill Lynch/Morgan Stanley, L.P. ("ML/MS") rights
in the Company's lymphoma products.  The stock issuances resulted in a non-cash
charge to operating expenses in 1995 of $11,437,000, representing the purchase
of the acquired technology rights.  The Series B Preferred Stock has a
liquidation preference of $100 per share.  Dividends shall accrue until March
15, 1997, thereafter, accrued dividends shall be payable quarterly.  No
dividends or other distribution shall be paid or declared, other than common
stock dividends on the Company's common stock, or on its Series A-7 Convertible
Preferred Stock which is not yet issued, unless and until accrued dividends on
the Series B Preferred Stock have been paid.  On March 16, 1997, the Series B
Preferred Stock and accrued dividends will automatically be converted into
common stock.  Cumulative dividends in arrears at December 31, 1996 totaled
approximately $1,248,000 or $17.96 per share.  Each share of Series B Preferred
Stock is convertible into the number of shares of common stock as equals 100
divided by the higher of $3.75 or the average closing price of the Company's
common stock as reported by the Nasdaq National Market for the 19 trading days
ending on March 1, 1997.

   Additionally, the Company issued 22,993 shares of its Series A-3 Nonvoting
Convertible Preferred Stock ("Series A-3 Preferred Stock") in March 1996,
100,000 shares of its Series A-6 Nonvoting Convertible Preferred Stock ("Series
A-6 Preferred Stock") in May 1996, 100,000 shares of its Series A-1 Nonvoting
Convertible Preferred Stock ("Series A-1 Preferred Stock") in April 1995, and
37,521 shares of its Series A-2 Nonvoting Convertible Preferred Stock ("Series
A-2 Preferred Stock") in August 1995, to Genentech pursuant to the terms of a
preferred






<PAGE>   10



stock purchase agreement.  The preferred stock purchase agreement was entered
into concurrently with a collaboration agreement as described in Note 7.  The
Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred
Stock and Series A-6 Preferred Stock have a liquidation preference per share of
$50, $67, $217 and $75, respectively, net of issuance costs.  Each share of
Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred
Stock is convertible at any time into ten shares of common stock.  Each share
of Series A-6 Preferred Stock is convertible into the number of shares of
common stock as equals 75 divided by the average closing price of the Company's
common stock as reported by the Nasdaq National Market for the 20 trading days
following the earlier of (i) FDA approval of IDEC-C2B8 or (ii) September 16,
2000.

   Common Stock:  In May 1996, the shareholders approved an increase in the
number of authorized common shares to 50,000,000 shares.  In June 1996, the
Company completed a public offering of 2,070,000 shares of its common stock
resulting in net proceeds of $46,277,000.  In March 1995, the Company issued
1,000,000 shares of its common stock for the repurchase of all ML/MS rights in
the Company's lymphoma products, see convertible preferred stock above.  In
June 1994, the Company completed a public offering of 2,800,000 shares of its
common stock resulting in net proceeds of $6,821,000.  In December 1994, the
Company issued 1,441,000 shares of its common stock pursuant to the terms of a
collaborative research and license agreement with SmithKline Beecham resulting
in net proceeds of $3,335,000.

   Stock Option Plans:  The Company has two active stock option plans.

   The 1988 Employee Stock Option Plan (the "Option Plan") was approved by the
shareholders in 1988 and was subsequently amended.  Under the Option Plan,
options for the purchase of the Company's common stock may be granted to key
employees (including officers), directors and outside consultants. Options may
be designated as incentive stock options or as nonqualified stock options and
generally vest over four years, except under a provision of the plan which
allows them to accelerate their vesting under certain conditions.  Options
under the Option Plan, which have a term of up to ten years, are exercisable at
a price per share not less than the fair market value (85 percent of fair
market value for nonqualified options) on the date of grant.  The aggregate
number of shares authorized for issuance under the Option Plan is 4,680,000.

   In September 1993, the Company adopted the 1993 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which was approved by the shareholders in
May 1994 and was subsequently amended.  A total of 250,000 shares of common
stock are reserved for issuance to individuals who serve as non-employee
members of the Board of Directors.  Options under the Directors Plan, which
have a term of up to ten years, are exercisable at a price per share not less
than the fair market value on the date or grant and vest over four years.

   A summary of the status of the Company's two active stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ended on those
dates is presented below (table in thousands, except  per share amounts):






<PAGE>   11





<TABLE>
<CAPTION>
                                                       Directors Plan                     Option Plan       
                                               ---------------------------       ---------------------------
                                                          Weighted Average                  Weighted Average
                                               Shares      Exercise Price        Shares      Exercise Price 
- ------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>           <C>                  <C>
Outstanding at December 31, 1993                   --             $     --        1,731              $  5.65
Granted                                            35                 5.63        2,052                 3.18
Exercised                                          --                   --          (24)                0.95
Cancelled                                          --                   --       (1,413)                6.61
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994                   35                 5.63        2,346                 2.96
Granted                                            70                 3.38          311                 3.90
Exercised                                         (10)                5.63         (157)                4.07
Cancelled                                         (10)                2.38          (33)                5.58
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995                   85                 4.15        2,467                 2.97
Granted                                            35                19.13        1,443                20.79
Exercised                                         (10)                4.00         (172)                2.43
Cancelled                                          (5)               19.13         (196)               10.10
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996                  105              $  8.45        3,542              $  9.86
- ------------------------------------------------------------------------------------------------------------
</TABLE>


   The following table summarizes information about the Directors Plan and the
Option Plan options outstanding as of December 31, 1996 (table in thousands,
except year and per share amounts):


<TABLE>
<CAPTION>
                                      Options Outstanding                           Options Exercisable     
                     -----------------------------------------------------    ------------------------------
                                      Weighted Average
     Range of            Number          Remaining        Weighted Average      Number      Weighted Average
 Exercise Prices      Outstanding     Contractual Life     Exercise Price    Exercisable     Exercise Price 
- ------------------------------------------------------------------------------------------------------------
<S>                           <C>                 <C>              <C>               <C>              <C>
Directors Plan:
$  2.38 -- $  5.63             75                 7.92             $  4.18            75              $  4.18
  19.13 --   19.13             30                 9.00               19.13            30                19.13

Option Plan:
$  0.88 -- $  2.56            885                 6.47                2.34           543                 2.21
   3.00 --    3.00            944                 7.70                3.00           685                 3.00
   3.25 --   16.00            474                 8.09                7.62            78                 6.22
  20.13 --   20.13            928                 9.06               20.13             4                20.13
  20.25 --   26.13            311                 9.62               24.93            --                  --
</TABLE>


   Employee Stock Purchase Plan:  In May 1993, the shareholders adopted the
Company's Employee Stock Purchase Plan (the "Purchase Plan"), which was
subsequently amended.  A total of 345,000 shares of common stock are reserved
for issuance.  Under the terms of the Purchase Plan, employees can choose to
have up to 10 percent of their annual compensation withheld to purchase shares
of common stock.  The purchase price of the common stock is at 85 percent of
the lower of the fair market value of the common stock at the enrollment or
purchase date.  During 1996, 1995 and 1994, 160,000, 63,000 and 38,000 shares,
respectively, were issued under the Purchase Plan.

   Pro Forma Information:  The Company has retained the approach under APB
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its Option Plan,
Directors Plan and Purchase Plan.  Had compensation cost for the Company's
stock-based compensation plans been determined consistent with Statement No.
123, the Company's net loss per share applicable to common stock would have
been increased to the pro forma amounts indicated below (table in thousands,
except per share amounts):


<TABLE>
<CAPTION>
                                                                                     1996               1995
- ------------------------------------------------------------------------------------------------------------
<S>                                              <C>                           <C>                <C>
Net loss applicable to common stock              As reported                    $  (5,651)          $(17,292)
                                                 Pro forma                        (10,152)           (17,608)

Net loss per common share                        As reported                   $    (0.34)        $    (1.18)
                                                 Pro forma                          (0.61)             (1.20)
</TABLE>







<PAGE>   12



   Pro forma net loss applicable to common stock reflects only options and
purchase rights granted in 1996 and 1995.  Therefore, the full impact of
calculating compensation cost for stock options and stock purchase rights under
Statement No. 123 is not reflected in the pro forma net loss amounts presented
above since compensation cost is reflected over the stock option vesting and
stock purchase subscription periods and compensation cost for stock options and
stock purchase rights granted prior to January 1, 1995 are not considered.  The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of zero percent;
expected volatility of 66.8 percent; risk-free interest rate of 6.2 percent;
and an expected option life of 5.5 years. The per share weighted-average fair
value of stock options granted during 1996 and 1995 at an exercise price equal
to the fair market value on the date of grant was $13.25 and $2.42,
respectively, on the date of grant using the Black-Scholes option-pricing
model.  The fair value of each purchase right is estimated on the date of
enrollment using the Black-Scholes option-pricing model with the following
assumptions used in 1996 and 1995: dividend yield of zero percent; expected
volatility of 66.8 percent; risk-free interest rates between 5.6 percent and
5.9 percent; and an expected life between 0.3 year and 2.0 years. The per share
weighted-average fair value of stock purchase rights granted during 1996 and
1995 was $9.05 and $2.65, respectively, on the subscription date using the
Black-Scholes option-pricing model.

   Stock Warrants:  Under an investment agreement and in part subject to the
Company's accomplishments of certain research and development objectives, SR
One Limited, SmithKline Beecham's venture capital subsidiary, purchased 200,000
common stock warrants in each 1993 and 1992.  In October 1996, these warrants
were exercised for 400,000 shares of common stock resulting in net proceeds of
$4,755,000.

   In December 1994 and August 1995, concurrent with the completion of a debt
financing, the Company issued warrants for the purchase of 294,000 and 46,000
shares, respectively, of common stock.  Such warrants have a six-year term and
are immediately exercisable at prices ranging between $2.29 and $6.22 per
share. The holders of the warrants have the option to exchange their warrants,
without the payment of cash or consideration, for a number of common shares
equal to the difference between the number of shares resulting by dividing the
aggregate exercise price of the warrants by the fair market value of the common
stock on the date of exercise and the number of shares that would have been
otherwise issued under the exercise.  In September 1996, 196,000 warrants were
exchanged for 169,000 shares of the Company's common stock.

   At December 31, 1996, 144,000 warrants to purchase common stock were
outstanding.

NOTE 9:      INCOME TAXES

   The following table summarizes the tax effects of temporary differences that
give rise to significant portions of the deferred tax assets at December 31,
1996 and 1995 (table in thousands):


<TABLE>
<CAPTION>
                                                                                     1996               1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                 <C>
Deferred tax assets:
 Accrued expenses                                                              $      531          $     253
 Property and equipment, principally due to difference in depreciation                448                 16
 Deferred rent expense                                                                607                451
 Amortization of fair value change in common stock warrants                           776                273
 Capitalized state research and experimentation costs                               2,090              1,883
 Acquired technology rights                                                         4,336              4,591
 Research and experimentation credit                                                5,078              3,907
 Net operating loss carryforwards                                                  24,247             22,938
  Other                                                                               333                252
- ------------------------------------------------------------------------------------------------------------
    Total gross deferred tax assets                                                38,446             34,564
  Valuation allowance                                                             (38,446)           (34,564)
- ------------------------------------------------------------------------------------------------------------ 
Net deferred taxes                                                             $       --          $      --
- ------------------------------------------------------------------------------------------------------------
</TABLE>


   In 1996, 1995 and 1994, the Company recognized an increase in the valuation
allowance of $3,882,000, $7,652,000 and $8,614,000, respectively.

   As of December 31, 1996, the Company had net operating loss and research and
experimentation tax credit






<PAGE>   13



carryforwards for Federal income tax purposes of approximately $66,345,000 and
$3,476,000, respectively, which expire beginning in 1999.  Net operating loss
carryforwards and research and experimentation tax credit carryforwards as of
December 31, 1996 for state income tax purposes are approximately $18,166,000
and $1,602,000, respectively, which expire beginning in 1997 and 1999,
respectively.

   The utilization of net operating losses and tax credits incurred prior to
the Company's initial public offering in 1991, may be subject to an annual
limitation under the Internal Revenue Code, due to a cumulative change in
ownership of more than 50 percent.  However, the Company believes that such
limitations will not have a material impact upon the utilization of such net
operating loss carryforwards.

NOTE 10:     COMMITMENTS

   Lease Commitments: In July 1992, the Company entered into a 15-year
operating lease for its headquarters, which commenced in 1993.  The Company has
the option to extend the term of the lease for two additional periods of five
years each.  In connection with the lease agreement, the Company loaned
$3,200,000 to the landlord (Note 4). In August 1996, the Company entered into a
7-year lease for additional office and warehouse facilities.  The Company has
the option to extend the term of this lease for two additional years.  In
addition to the monthly lease payments, both lease agreements  provide for the
Company to pay all operating costs associated with the facilities.  The lease
agreements provide for scheduled rental increases; accordingly lease expense is
recognized on a straight-line basis over the term of the leases.

   Future minimum lease payments under all operating leases as of December 31,
1996, are as follows (table in thousands):


<TABLE>
<S>                                                                                                 <C>
1997                                                                                                $  2,906
1998                                                                                                   3,158
1999                                                                                                   3,422
2000                                                                                                   3,559
2001                                                                                                   3,702
2002 and thereafter                                                                                   22,295
- ------------------------------------------------------------------------------------------------------------
Total minimum lease payments                                                                         $39,042
- ------------------------------------------------------------------------------------------------------------
</TABLE>


   Lease expense under all operating leases totaled $3,011,000,  $3,097,000 and
$3,076,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

   License Agreements:  In connection with its research and development
efforts, the Company has entered into various license agreements which provide
the Company with rights to develop, produce and market products using certain
know-how, technology and patent rights maintained by the parties.  Terms of the
various license agreements require the Company to pay royalties from future
sales, if any, on specified products using the resulting technology.  As of
December 31, 1996, such royalties have not commenced on the aforementioned
license agreements.






<PAGE>   14




IDEC Pharmaceuticals Corporation and Subsidiary

Independent Auditors' Report


The Board of Directors and Shareholders
IDEC Pharmaceuticals Corporation:


   We have audited the accompanying consolidated balance sheets of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996.  These consolidated financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.


                                                KPMG PEAT MARWICK LLP


San Diego, California
February 7, 1997











<PAGE>   1




                                                                  Exhibit 23.0

                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY


              INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT


The Board of Directors
IDEC Pharmaceuticals Corporation:

The audits referred to in our report dated February 7, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the 1996
Annual Report on Form 10-K.  This financial statement schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

We consent to incorporation by reference in registration statements Nos.
33-90738, 33-93794 and 333-06543 on Forms S-8 of IDEC Pharmaceuticals
Corporation of our report dated February 7, 1997, relating to the consolidated
balance sheets of IDEC Pharmaceuticals Corporation and subsidiary as of December
31, 1996 and 1995, and the related consolidated statements
 of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the 1996 Annual Report
on Form 10-K of IDEC Pharmaceuticals Corporation.  We also consent to the use of
our report on the related schedule included herein.



                                        KPMG PEAT MARWICK LLP

San Diego, California
March 28, 1997









<PAGE>   1





                                                                    Exhibit 23.1

                                  SCHEDULE II

                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

                  Years Ended December 31, 1996, 1995 and 1994



<TABLE>
<CAPTION>
                                                                Additions        
                                                       --------------------------
                                            Balance     Charged to     Charged to                    Balance
                                           beginning    costs and         other                       at End
Name of Debtor                              of year      expenses       accounts      Deductions     of Year
- ----------------------------------          -------      --------       --------      ----------     -------
<S>                                       <C>           <C>            <C>           <C>            <C>
Year ended December 31, 1996
    Allowance for contract research
       revenue receivables                $    658      $     --        $  1,423     $     (400)     $1,681
                                          --------      --------        --------     ----------      ------
                                          $    658      $     --        $  1,423     $     (400)     $1,681
                                          ========      ========        ========     ==========      ======

Year ended December 31, 1995
    Allowance for contract research
       revenue receivables                 $    --      $     --        $    658     $        --     $  658
                                           -------      --------        --------     -----------     ------
                                           $    --      $     --        $    658     $        --     $  658
                                           =======      ========        ========     ===========     ======

Year ended December 31, 1994
    Allowance for contract research
      revenue receivables                  $    --      $     --       $      --     $        --    $    --
                                           -------      --------       ---------     -----------    -------
                                           $    --      $     --       $      --     $        --    $    --
                                           =======      ========       =========     ===========    =======
</TABLE>











<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTAINED
IN EXHIBIT 13.3 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIALS STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                          25,337
<SECURITIES>                                    53,390
<RECEIVABLES>                                    5,316
<ALLOWANCES>                                     1,681
<INVENTORY>                                      4,384
<CURRENT-ASSETS>                                91,615
<PP&E>                                          30,058
<DEPRECIATION>                                   8,605
<TOTAL-ASSETS>                                 113,829
<CURRENT-LIABILITIES>                           13,687
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                     26,586
<COMMON>                                       148,597
<OTHER-SE>                                     (82,569)
<TOTAL-LIABILITY-AND-EQUITY>                   113,829
<SALES>                                          1,505
<TOTAL-REVENUES>                                     0
<CGS>                                            1,384
<TOTAL-COSTS>                                    1,384
<OTHER-EXPENSES>                                26,763
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               2,697
<INCOME-PRETAX>                                 (4,955)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                             (4,955)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    (4,955)
<EPS-PRIMARY>                                    (0.34)
<EPS-DILUTED>                                        0
        

</TABLE>