<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-K/A
                                        
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  For the fiscal year ended December 31, 1998

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

                          Commission File No. 0-12943

                            CYPRESS BIOSCIENCE, INC.
             (Exact name of registrant as specified in its charter)
                                _______________

          DELAWARE                                        22-2389839
(State or other jurisdiction of                 (I.R.S. Employer Identification 
incorporation or organization)                                 No.)

   4350 EXECUTIVE DRIVE, SUITE 325
        SAN DIEGO, CALIFORNIA                                 92121
(Address of principal executive offices)                    (Zip Code)

      Registrant's telephone number, including area code:  (619) 452-2323
                                        
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                          COMMON STOCK $.02 PAR VALUE
                        COMMON STOCK PURCHASE WARRANTS
                     UNITS CONSISTING OF TWO (2) SHARES OF
            COMMON STOCK AND ONE (1) COMMON STOCK PURCHASE WARRANT
                               (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 1, 1999 was $63,130,188.*

The number of shares outstanding of the Registrant's Common Stock as of March 1,
1999 was 42,607,582.

DOCUMENTS INCORPORATED BY REFERENCE:  None

______________________

* Calculated based on 20,610,574 shares of Common Stock held as of March 1, 1999
by nonaffiliates and a per share market price of $3.063. Excludes 21,997,008
shares of Common Stock held by directors and executive officers and stockholders
whose ownership exceeds five percent of the Common Stock outstanding at March 1,
1999. Exclusion of such shares should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.


<PAGE>
 
                                    PART II

Item 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
         MATTERS

     The Company's common stock is traded on the over-the-counter market on the
NASDAQ SmallCap Market under the symbol "CYPB". Prior to May 21, 1996 the
Company's common stock was traded on the NASDAQ SmallCap Market under the symbol
"IMRE". Set forth below are the high and low sales prices for the Company's
common stock for the first quarter of 1999 (through March 1, 1999) and each
quarter of 1998 and 1997 as reported by the NASDAQ Stock Market, Inc.

                                                Price Range of Common Stock
                                              --------------------------------
                                              High                         LOW
                                              ----                         ---
YEAR ENDED DECEMBER 31, 1999:
 First Quarter (through March 1, 1999)....    $3.97                        $2.31

YEAR ENDED DECEMBER 31, 1998:
 First Quarter............................    $3.81                        $1.28
 Second Quarter...........................     3.69                         2.56
 Third Quarter............................     3.00                         1.44
 Fourth Quarter...........................     3.25                         2.19
 
YEAR ENDED DECEMBER 31, 1997
 First Quarter............................    $2.06                        $1.50
 Second Quarter...........................     2.56                         1.18
 Third Quarter............................     2.63                         1.50
 Fourth Quarter...........................     1.97                         1.15

     The above quotations are interdealer prices, without retail mark-up, mark-
down or commission and may not necessarily represent actual transactions.  As of
March 1, 1999, there were approximately 943 holders of record of the Common
Stock of the Company.  The Company has never paid cash dividends on its common
stock and does not anticipate any being paid in the foreseeable future.

Recent Sales of Unregistered Securities
---------------------------------------

     In September 1998, the Company completed a private placement of 3,063,561
shares of the Company's Series A convertible preferred stock (the "Preferred
Shares") at a price of $1.50 per share for an aggregate offering price of
approximately $4.6 million. Net proceeds (after deducting placement fees of
approximately $113,000, and other related expenses of approximately $152,000) to
the Company were approximately $4.3 million. Each of the purchasers of the
Preferred Shares was an "accredited investor" within the meaning of rule 501(a)
promulgated under the Securities Act. The Company relied on the exemption
provided by Section 4(2) under the Act. On January 20, 1999, the outstanding 
Preferred Shares were automatically converted into an equal number of shares of 
the Company's Common Stock.

                                      16.
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information as of March 1, 1999 with respect
to (i) each stockholder known to the Company to be the beneficial owner of more
than five percent (5%) of the outstanding common stock or Series A Preferred
Stock of the Company, (ii) each director, (iii) each Named Executive Officer and
(iv) all directors and Named Executive Officers of the Company as a group.
Except as set forth below, each of the named persons and members of the group
has sole voting and investment power with respect to the shares shown.

<TABLE>
<CAPTION>     
                                                                  AMOUNT AND NATURE OF
                                                                 BENEFICIAL OWNERSHIP OF     PERCENT OF CLASS OF
BENEFICIAL OWNER OF COMMON STOCK (1)                               COMMON STOCK  (2)          COMMON STOCK (2)
------------------------------------                             -----------------------     -------------------
<S>                                                              <C>                         <C>
Allen & Company Incorporated.............................            7,328,307  (3)                 16.9%
 711 Fifth Avenue
 New York, New York  10022
Paramount Capital Asset Management, Inc..................           10,117,302  (4)                 23.7%
 787 Seventh Avenue, 44th Floor
 New York, NY 10019
Jay D. Kranzler..........................................            3,477,277  (5)                  7.6%
Debby Jo Blank...........................................            1,465,966  (6)                  3.4%
R. Michael Gendreau......................................              322,414  (7)                  *
Richard M. Crooks, Jr....................................            1,131,897  (8)                  2.7%
Jack H. Vaughn...........................................               66,000  (9)                  *
Philip J. O'Reilly.......................................               66,050 (10)                  *
Samuel D.  Anderson......................................              128,558 (11)                  *
David  Golde.............................................               27,052 (12)                  *
All Directors and Named Executive Officers as a                                                    
 Group (8 persons).......................................            6,685,214                      14.2% 
                                                                    ----------
</TABLE>
________________________
*Less than one percent

(1)  This table is based upon information supplied by officers, directors and
     principal stockholders and Schedule 13Ds filed with the Securities and
     Exchange Commission (the "Commission"). Except as shown otherwise in the
     table, the address of each stockholder listed is in care of the Company at
     4350 Executive Drive, Suite 325, San Diego, California, 92121.
(2)  Except as otherwise indicated in the footnotes of this table and pursuant
     to applicable community property laws, the persons named in the table have
     sole voting and investment power with respect to all shares of Common
     Stock. Beneficial ownership is determined in accordance with the rules of
     the Commission and generally includes voting or investment power with
     respect to securities. Shares of Common Stock subject to options or
     warrants exercisable within 60 days of March 1, 1999 are deemed outstanding
     for computing the percentage of the person or entity holding such options
     or warrants but are not deemed outstanding for computing the percentage of
     any other person. Percentage of beneficial ownership is based upon
     42,607,582 shares of the Company's Common Stock outstanding as of March 1,
     1999.
(3)  This information was derived from information provided to the Company by
     Allen & Company Incorporated. Includes warrants to purchase 478,000 shares
     of Common Stock exercisable within 60 days of March 1, 1999 (125,000 of the
     warrants are held in the name of Susan Allen). Also includes 250,000 shares
     of Common Stock held in the name of Susan Allen.
(4)  Dr. Lindsay A. Rosenwald is the sole shareholder of Paramount Capital Asset
     Management, Inc. ("Paramount Capital"). Paramount Capital is the general
     partner of Aries Domestic Fund, L.P., a limited partnership incorporated in
     Delaware ("Aries Domestic") and the investment manager of The Aries Master
     Fund, a Cayman Islands trust ("The Aries Master Fund").  Includes warrants
     to purchase 37,500 shares of Common Stock held by Aries Domestic and
     warrants to purchase 87,500 shares of Common Stock held by The Aries Master
     Fund, in each case such warrants being exercisable within 60 days of March
     1, 1999.  Of the 9,992,302 shares of Common Stock (excluding warrants)
     indicated as beneficially held, Paramount Capital shares voting and
     dispositive power with the following persons or entities: Dr. Rosenwald
     with respect to 791,667 of the shares; Aries Domestic with respect to
     2,696,000 of the shares; and The Aries Master Fund with respect to
     6,504,635 of the shares.

                                      33.
<PAGE>
 
(5)  Includes 3,007,343 shares of Common Stock issuable pursuant to options
     exercisable within 60 days of March 1, 1999. Also includes 264,936 shares
     of Common Stock held by the Company's 401(k) plan for which Dr. Kranzler,
     as co-trustee of the 401(k) plan, has voting rights to such shares and
     5,000 shares of Common Stock held by the Kranzler Children's Trust dated
     1991. Mr. Kranzler disclaims beneficial ownership of the shares held by the
     Kranzler Children's Trust.
(6)  Includes 1,001,032 shares of Common Stock issuable pursuant to options
     exercisable within 60 days of March 1, 1999. Also includes 264,936 shares
     of Common Stock held by the Company's 401(k) plan for which Dr. Blank, as
     co-trustee of the 401(k) plan, has voting rights to such shares.
(7)  Includes 322,414 shares of Common Stock issuable pursuant to options
     exercisable within 60 days of March 1, 1999.
(8)  Includes 50,000 shares of Common Stock issuable pursuant to options
     exercisable within 60 days of March 1, 1999. Also includes 692,829 shares
     of Common Stock and presently exercisable warrants to purchase 6,667 shares
     of Common Stock held by Allen & Company Incorporated, in which Mr. Crooks
     has a pecuniary interest pursuant to an arrangement with Allen & Company
     Incorporated.
(9)  Includes 65,000 shares of Common Stock issuable pursuant to options
     exercisable within 60 days of March 1, 1999.
(10) Includes 50,000 shares of Common Stock issuable pursuant to options or
     other rights exercisable within 60 days of March 1, 1998.
(11) Includes 100,000 shares of Common Stock held by Samuel D. and Mary Ann H.
     Anderson as trustees of the Samuel and Mary Ann Anderson trust dated March
     22, 1979.  Also includes 28,558 shares of Common Stock issuable pursuant to
     options exercisable within 60 days of March 1, 1999.
(12) Includes 27,052 shares of Common Stock issuable pursuant to options
     exercisable within 60 days of March 1, 1998.

                                      34.
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    CYPRESS BIOSCIENCE, INC.

                                    By:     /s/ JAY D. KRANZLER 
                                           ---------------------         
                                                Jay D. Kranzler, M.D., Ph. D.
                                                Chief Executive Officer, and
                                                Chief Financial Officer

Date:  April 21, 1999

                               POWER OF ATTORNEY

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

<TABLE>
<CAPTION>
SIGNATURE                                                          TITLE                               DATE
---------                                                          -----                               ----
<S>                                         <C>                                                    <C> 
    JAY D. KRANZLER                         Chief Executive Officer, Chief Financial Officer and   April 21, 1999
-----------------------------------------   Chairman of the Board (Principal Executive Officer
Jay D. Kranzler, M.D., Ph.D.                and Principal Financial and Accounting Officer)

    RICHARD M. CROOKS, JR.*                 Director                                               April 21, 1999
-----------------------------------------
Richard M. Crooks, Jr.
 
    PHILIP J. O'REILLY*                     Director                                               April 21, 1999
-----------------------------------------
Philip J. O'Reilly
 
    JACK H. VAUGHN*                         Director                                               April 21, 1999
-----------------------------------------
Jack H. Vaughn
 
    SAMUEL D. ANDERSON*                     Director                                               April 21, 1999
-----------------------------------------
Samuel D. Anderson
 
    DAVID GOLDE*                            Director                                               April 21, 1999
-----------------------------------------
David Golde, M.D.

*By:  /s/  JAY D. KRANZLER
    -------------------------------------
    Jay D. Kranzler
    Attorney-in-Fact
</TABLE> 

                                      40.
<PAGE>
 
     In accordance with certain provision of the Internal Revenue Code ("IRC"),
a change in ownership of greater than 50% within a three-year period will place
an annual limitation on the Company's ability to utilize its existing net
operating loss and tax credit carryforwards.

     As a result of the Company's sales of common stock, ownership changes
occurred in September 1991 and October 1997.  Accordingly, the utilization of
net operating loss carryforwards which had accumulated as of September 1991 and
October 1997 will be limited to a prescribed amount in each successive year.
However, the Company believes that this limitation will not have a material
effect on the financial statements.


11.  SUBSEQUENT EVENTS

     On January 20, 1999, the average closing sales price of the Company's
common stock was equal to or greater than $3.00 per share for a period of 20 out
of 30 trading days. Therefore, the 1,156,832 shares of outstanding preferred
stock at December 31, 1998 were automatically converted into common stock.

     In February 1999, the Company entered into a sublease to occupy 21,000 
additional square feet of manufacturing space in Redmond, Washington, which
expires in 2005. Future minimum lease obligations under this operating lease is
as follows: $243,250 in 1999; $357,000 in 2000; $369,250 in 2001; $378,000 in
2002; $388,500 in 2003, and $565,250 thereafter.

     In February 1999, the Company entered into an employment agreement to hire 
a president, chief operating officer and corporate secretary, whereby the 
compensation consists of a base salary of $215,000 and the eligibility, at the 
sole discretion of the Board of Directors, for an annual bonus equal to 25% of 
the base salary. The Company also granted options to purchase up to 500,000 
shares of the Company's common stock at an exercise price of $2.75 per share,
the fair market value on the date of grant. The options vest 25% in February
2000 and monthly thereafter. In the event the employment is terminated by the
Company without cause due to a corporate merger or acquisition, the options will
vest and become fully exercisable.

     The Company entered into a license and distribution agreement with
Fresenius AG, a German company, and its U.S. subsidiary, Fresenius
Hemotechnology, Inc. ("Fresenius") on March 26, 1999, whereby the Company
granted to Fresenius the exclusive right to manufacture, sell and distribute the
Prosorba column in the United States, Europe and Latin America, and subject to
certain conditions, Japan, Thailand, China, New Zealand, Hong Kong, Korea, India
and China. The agreement also provides for the equal sharing of profits
attributable to the marketing of the Prosorba column and related products. As
part of this agreement, the Company received approximately $1.0 million from the
sale of 297,530 shares of the Company's common stock at $3.361 per share,
$500,000 from the issuance of a warrant to purchase 342,466 shares of the
Company's common stock at $7.50 per share, and approximately $4.1 million under
a line of credit agreement due upon the earlier of (i) the date on which
Fresenius exercises its option to purchase the Company's manufacturing facility
in Redmond, Washington or (ii) December 31, 2000. Management believes that these
funds, along with the existing cash balances, are adequate to fund operations
through December 31, 1999.

     In March 1999, the Company demanded redemption of warrants to purchase 
approximately 2.7 million shares of common stock with an exercise price of $2.00
per share. The warrants will be redeemed on April 19, 1999 if not exercised 
prior to or on April 12, 1999.

                                      F-17