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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                 ==============
                                    FORM 10-K
(Mark One)
 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---      EXCHANGE ACT OF 1934                                                  
         For the fiscal year ended December 31, 1997
                                       OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the transition period from _____ to _____

                         Commission File Number 0-11749
                           --------------------------
                                   SCIOS INC.
                           --------------------------
             (Exact name of registrant as specified in its charter)

             DELAWARE                                          95-3701481
         -----------------                                   ----------------
         (State or other jurisdiction of                     (I.R.S. Employer
         incorporation or organization)                      Identification No.)

           2450 Bayshore Parkway, Mountain View, California 94043-1173
           -----------------------------------------------------------
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (650) 966-1550

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

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $0.001 par value
                    Class D Warrants to purchase Common Stock
                            Contingent Payment Rights
                          Common Share Purchase Rights

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

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

The approximate  aggregate  market value of voting stock held by  nonaffiliates
of the registrant as of March 16, 1998 was $411,856,747.

As of March 16, 1998,  37,655,474  shares of the registrant's  Common Stock were
outstanding (net of Treasury Shares).

                       DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                        Form 10-K Part
---------                                                        --------------
Definitive Proxy Statement with respect to                            III
the 1998 Annual Meeting of Stockholders

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<PAGE>

                                     PART I

Item 1.  BUSINESS

Overview

    Scios Inc. ("Scios" or the "Company") is a biopharmaceutical company engaged
in the discovery, development,  manufacture and commercialization of novel human
therapeutics   based   upon  its   capabilities   in  both   protein-based   and
small-molecule  drug  discovery and  development.  Scios has two major  clinical
development  programs.  NATRECOR(R)  nesiritide  citrate has completed Phase III
clinical studies for the treatment of acute congestive heart failure.  An NDA is
expected  to be filed with the U.S.  Food and Drug  Administration  in the first
half of 1998. FIBLAST(R) trafermin is in Phase II/III clinical trials for stroke
and in Phase II clinical trials for other vascular indications.

    The  Company  focuses  its  proprietary  research  and  development  efforts
primarily in the areas of cardiorenal  disorders and Alzheimer's disease.  Scios
has capabilities in molecular and cell biology, protein and medicinal chemistry,
molecular modeling,  pharmacology,  and the bioprocessing  sciences, and has the
tools to undertake the rational  design of small molecules based on knowledge of
molecular targets. The Company has research and development  collaborations with
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation,  Eli Lilly and Company,  The DuPont Merck  Pharmaceutical  Company,
Kaken  Pharmaceutical  Co.,  Ltd., and Novo Nordisk A/S. More detail is provided
below in "Business -- Products in Development."

    In September 1997, the Company announced positive Phase III clinical results
from its  pivotal  efficacy  study of  NATRECOR(R)  for the  treatment  of acute
congestive  heart failure (CHF).  In January,  1998,  the Company  announced the
successful  conclusion  of  another  clinical  trial  focused  on the  safety of
NATRECOR(R).  In the next several months,  the Company will file with the United
States  Food and Drug  Administration  ("FDA")  a New Drug  Application  ("NDA")
seeking approval to market NATRECOR(R) in the United States. The Company expects
to form a commercial  partnership  to market  NATRECOR(R)  with a  multinational
pharmaceutical company.

    Scios'  collaborators  on  FIBLAST(R)  are Kaken  Pharmaceutical  Co.,  Ltd.
("Kaken") of Japan, and the Wyeth-Ayerst  Laboratories division of American Home
Products Corporation ("Wyeth-Ayerst").  In June 1996, Kaken filed an NDA seeking
approval to market  FIBLAST(R) in Japan as a treatment for recalcitrant  wounds.
In October 1996,  Wyeth-Ayerst began working with Scios on the use of FIBLAST(R)
in the treatment of stroke and vascular disorders. During 1997, Wyeth-Ayerst and
Scios  initiated two Phase II/III  clinical  trials in which  FIBLAST(R) will be
evaluated  in an aggregate of 1,800  patients  for the  treatment of stroke.  In
April  1997,  the  Company  announced  the  suspension  of  the  development  of
AURICULIN(R)  anaritide based on the results of an interim analysis of data from
a 250-patient  Phase III study on oliguric  acute renal  failure.  The study was
suspended due to the low probability  that a positive  outcome could be obtained
with  respect  to  its  primary  clinical  endpoint,   dialysis  free  survival.
AURICULIN(R)  was  under  development  in  collaboration  with  Genentech,  Inc.
Suspension  of this  development  program,  despite  indications  of  success in
earlier trials,  demonstrates the challenges and risks inherent in the Company's
business of pharmaceutical development.

    The Company also has a profitable  marketing and sales organization  selling
third-party  products that generate cash to help fund  continued  development of
the Company's proprietary products. This flex-time sales force markets a line of
psychiatric products.  This includes four products that are sold under a license
from SmithKline  Beecham  Corporation:  ESKALITH(R),  ESKALITH CR(R)  (lithium),
THORAZINE(R)  (chlorpromazine),  STELAZINE(R)  (trifluoperazine)  and PARNATE(R)
(tranylcypromine). In addition, in 1997 the Scios sales force marketed HALDOL(R)
Decanoate (haloperidol) for Ortho-McNeil Pharmaceutical, an affiliate of Johnson
&  Johnson,  and  EFFEXOR(R)  (venlafaxine  HCl),  which  was  co-promoted  with
Wyeth-Ayerst. See "Business -- Marketing and Sales."

    Prior to approval of its first product,  Scios' financial  strategy involves
careful  management  of  cash  while  investing  in its  product  pipeline,  and
generating cash flow from its commercial  operations and corporate  partnerships
supporting specific products under development. Certain of the Company's product
candidates have been licensed to corporate partners for development or are being
developed by Scios with funding from corporate partners.  Under its arrangements
with corporate  partners,  Scios  typically  receives  research and  development
funding,  payments for clinical supplies and/or milestone payments for achieving
scientific and clinical benchmarks.  Generally,  the Company is also entitled to
royalties  on  commercial  sales of  products  by its  partner  or will share in
profits in countries where Scios is  co-marketing  the product with its partner.
In some cases,  Scios may receive all or part of its compensation in the form of
payments for the supply of the product.
<PAGE>

    Scios is seeking to reach  profitability  in the next several  years through
development of certain products, collaborations with corporate partners on other
products and the  expansion of its  marketing  and sales  capability.  Until the
suspension  of the  development  of  AURICULIN(R),  the Company had  expected to
achieve profitability in 1998 based on development milestone payments related to
that product which the Company  expected to receive from Genentech Inc. As these
events demonstrate,  the Company's goal for achieving profitability,  as well as
other statements in this Annual Report on Form 10-K concerning  matters like the
results  and timing of product  development,  future  revenues,  operations  and
expenditures,  regulatory  approval  and market  introduction  of the  Company's
products  are  "forward-looking  statements"  which are subject to change.  Each
statement is based on current  expectations of the Company when the statement is
made and is subject to the risks and  uncertainties  inherent  in the  Company's
business.  In accordance with the Private  Securities  Litigation  Reform Act of
1995 ("PSLRA-95"),  the Company reminds investors that all such "forward-looking
statements" are necessarily only estimates of future results and that the actual
results achieved by the Company may differ materially from these projections due
to a number of  factors,  including:  (1) the  demonstration  of the  safety and
efficacy  of its  products  at each stage of  clinical  development;  (2) timely
regulatory  approval and patent and other proprietary  rights protection for the
Company's products; (3) the actions of third parties,  including  collaborators,
licensees, manufacturing partners, and competitors; (4) market acceptance of the
Company's  products;  (5) the  ability  to  manufacture  product  candidates  in
commercial  quantities at reasonable cost and in a manner  acceptable to various
regulatory  authorities;  and  (6) the  accuracy  of the  Company's  information
concerning the products and resources of competitors and potential  competitors.
Factors creating uncertainty are discussed in more detail in individual sections
of this  Annual  Report  on  Form  10-K.  In  particular  see  "Business-Product
Development  Activities and Risks" below and the "Outlook and Risks" sections of
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

    The  Company  was  incorporated  in  California  in  1981  under  the  name
California  Biotechnology  Inc.  and reincorporated  in Delaware  in 1988.  The
Company  changed  its name to Scios Inc. in February  1992,  to Scios Nova Inc. 
in September 1992  following  acquisition  of Nova  Pharmaceuticals,  Inc., and
returned to using the name Scios Inc. in March 1996. The principal  executive
offices of the Company are located at 2450 Bayshore  Parkway,  Mountain View, 
California 94043.  The telephone number at that location is (650) 966-1550.

<PAGE>

Product Development Activity Table
----------------------------------

    The  following  table  summarizes  certain  information   concerning  Scios'
principal products under development.  The information in the table is qualified
in its entirety by reference to the more  detailed  information  concerning  the
Company's products that is set forth elsewhere in this report:
<TABLE>
<CAPTION>

                                                        Potential Applications              Developer/Corporate
Product                     Status                      Indications                         Partner (Territory)
-------                     ------                      -----------                         ------------------ 
<S>                         <C>                         <C>                                 <C>    
NATRECOR(R)(nesiritide      Phase III complete          Acute congestive heart failure      Under negotiation
citrate)                    NDA Filing Spring 1998
NATRECOR(R)(nesiritide      Phase II                    Post operative hypertension                     --
citrate)
FIBLAST(R)trafermin         NDA submitted (Japan)       Recalcitrant dermal wounds          Kaken Pharmaceutical Co., Ltd.
FIBLAST(R)trafermin         Phase II/III                Stroke                              Wyeth-Ayerst Laboratories
FIBLAST(R)trafermin         Phase II                    Peripheral vascular disease         Wyeth-Ayerst Laboratories
FIBLAST(R)trafermin         Phase II                    Coronary artery disease             Wyeth-Ayerst Laboratories
VEGF121                     Phase I                     Cardiovascular disease: gene        GenVec,Inc.
                                                        therapy
VEGF121                     Preclinical                 Cardiovascular disease:  protein                --
                                                        therapy
BNP diagnostic assay        Marketed (Japan & Europe)   Heart failure diagnosis/monitoring  Shionogi Pharmaceutical Co., Ltd.
BNP diagnostic assay        Development                 Heart failure diagnosis/monitoring  Abbott Laboratories
                                                                                            Biosite Diagnostics
Serine protease             Development                 Cardiopulmonary Bypass                          --
inhibitors
INSULINOTROPIN              Preclinical                 Type 2 diabetes                     Novo Nordisk A/S
Secreted protein therapies  Research                    Cardiovascular disorders                        --
Kinase inhibitors           Research                    Cardiovascular disorders                        --
Beta-amyloid modulators     Research                    Alzheimer's disease                 Eli Lilly and Company
                                                                                            The DuPont Merck Pharmaceutical
                                                                                            Company
<FN>
--------------------
* "Research"  denotes  discovery  research and initial  bench scale  production.
"Preclinical"   denotes  studies  in  animal  models  necessary  to  support  an
application to the FDA and foreign health  registration  authorities to commence
clinical  testing in humans.  Clinical  trials for  pharmaceutical  products are
conducted  in three  phases.  In Phase I,  studies are  conducted  to  determine
safety.   In  Phase  II,  studies  are  conducted  to  gain  additional   safety
information,  as well as preliminary evidence as to the efficacy and appropriate
doses of the product.  In Phase III, studies are conducted to provide sufficient
data for the statistical proof of safety and efficacy, including dosing regimen.
Phase III is the final stage of such clinical studies prior to the submission of
an application for approval of a new drug or licensure of a biological  product.
"NDA filed"  means an  application  for  commercial  sale of a new drug has been
filed in the indicated  country  seeking  approval to market the product in that
country for the covered indication.
</FN>
</TABLE>

<PAGE>

Product Development Activities and Risks
----------------------------------------

    Scios  currently  focuses its product  research and  development  efforts on
proprietary  novel  therapeutics,   principally  in  the  areas  of  cardiorenal
disorders and  Alzheimer's  disease.  The  Company's  success will depend on its
ability to achieve  scientific and technological  advances and to translate such
advances into reliable,  commercially competitive products on a timely basis. As
described  in  "Business  -- Products In  Development,"  Scios'  products are at
various  stages  of  research  and  development,   and  in  most  cases  further
development   and  testing  will  be  required  to  determine   their  technical
feasibility and commercial  viability.  The Company cautions  investors that its
business is subject to significant risks and uncertainties.  In particular,  the
proposed  development  schedules for the Company's products may be affected by a
wide  variety of  factors,  including  technological  difficulties,  proprietary
technology and rights developed by others,  reliance on third parties to perform
certain  activities or provide  certain  resources,  and changes in governmental
regulation.  Many of these factors will not be within the control of Scios. As a
result,  there can be no assurance  that any of the  products  described in this
Item  1  or  resulting  from  Scios'  research  programs  will  be  successfully
developed, prove to be safe and effective, meet applicable regulatory standards,
be capable of being produced in commercial quantities at reasonable costs, or be
successfully marketed.

    In developing pharmaceutical products, the Company faces critical challenges
in at least three broad areas:  the discovery of novel  compounds that are worth
developing;  the successful  clinical  testing in humans of candidate  compounds
that  the  Company  and  its  collaborators  deem  worthy  of  development;  and
competition  in many forms and areas.  The discovery  process in  pharmaceutical
development  often involves doing or understanding  what has not previously been
done or  understood,  while  working in  biological  systems that are not always
predictable  or  predictive.  Pharmaceutical  drug  discovery  is an  inherently
challenging  and risky  undertaking in which numerous  factors come into play in
determining  success or failure.  Some of the key factors include the ability to
identify appropriate targets and models to use in understanding  complex disease
processes,  to comprehensively screen many compounds under consistent conditions
in order to identify those which show promise,  to build on insights gained from
numerous and  frequently  imperfect  data points in selecting the compounds most
likely to treat the target disease, even though the target disease itself is not
completely  understood  (both as to what causes that disease and how the disease
manifests itself), and to avoid being misled by false indicators.  These efforts
all take place in increasingly  competitive environments in which many companies
are often  simultaneously  trying to apply their  resources  and insights to the
same  targets  and  challenges.  How  well a  particular  company  marshals  its
resources to attack an issue will often  determine  its  success.  Because it is
impractical,  if not impossible,  for any company to do everything imaginable to
acquire  sufficient  knowledge to assure  success in meeting  these  challenges,
intuition,  untested  assumptions and luck can sometimes play a significant role
in determining a particular  company's success in  pharmaceutical  discovery and
development.

    The Company particularly cautions investors that any decision to commence or
continue  clinical trials in humans based on the results of preclinical  work in
cell-based  assays  and  animal  models or an  earlier  clinical  study does not
necessarily  mean that the results achieved in subsequent human clinical studies
will be similar to those achieved in the earlier studies. A central issue in all
pharmaceutical  development  is  how  well  a  particular  cell-based  assay  or
preclinical animal model selected by the investigator predicts the effectiveness
of  a  drug  candidate  in  treating  the  target  disorder  in  humans.   While
well-developed and well-tested models exist for some disorders,  often it is not
possible to know with certainty the predictive  quality of a model until results
in humans are obtained. In some cases, it turns out that the selected model does
not  accurately  predict the effect of a drug candidate in humans or whether the
product is safe to use in humans at all.

    In clinical testing of compounds selected for development, the Company faces
challenges in several  areas.  In the clinical  trial  initiation  phase,  these
factors  include  creating a sound study design that will,  as  effectively  and
efficiently as possible, reveal the safety and efficacy of a particular compound
and then finding appropriate clinical investigators who can identify and recruit
patients and follow the clinical  protocol.  Each clinical trial itself contains
the risk that a  compound  will not  produce  positive  clinical  results in the
specific  subjects  included in that study  population  or that it will  produce
ambiguous or mixed  results in which the benefits of the compound do not clearly
enough  outweigh  any adverse side  effects,  or that  judgments  will have been
incorrect about how large the study  population  needed to be to demonstrate the
effects of the  compound.  Uncertainty  as to the  outcome is  inherent in every
clinical  trial,  even when a previous  clinical  study has produced a favorable
result. This was demonstrated in the Company's experience with AURICULIN(R). See
"Business -- Additional Products" below.

    When clinical  trials for a compound are completed,  a vast quantity of data
on a wide  range  of  topics  must be  assembled  in a  manner  that  will  give
regulatory  authorities  the  basis,  following  intense  review  by the FDA and
comparable  regulators in other  countries,  to decide whether or not to approve
the product for marketing. Inherent in the regulatory review process is the risk
that the particular  regulatory agency will not find  sufficiently  reliable the
methods  that the company  selected  or that such  agency  will place  different
weight on various  factors  and  results  than the  developing  company  did. In
addition,  when another  company's product is already on the market to treat the
target  indication,  the company  developing a new drug for the same  indication
faces  additional  challenges,  which  may  include  demonstrating  that the new
product has superior  properties or economic benefit.  Because the regulators in
various countries operate under different regulatory systems and approaches, the
decisions and  requirements  with respect to the clinical  testing of a compound
may vary from one country to another.  These issues and a company's inability to
address them  adequately may lead the regulatory  authority to put limits on how
or for what  indication  a compound may be marketed,  which  directly  affects a
product's  commercial  success.  Failure  to  deal  with  these  factors  to the
satisfaction of the regulatory authority can also lead to the denial or delay of
approval to market a product.
<PAGE>

    The Company plans to continue the development of selected products primarily
under the sponsorship of corporate  partners.  The Company's  alliances with Eli
Lilly and Company and The DuPont Merck Pharmaceutical Company in the Alzheimer's
field and with Kaken and  Wyeth-Ayerst  on FIBLAST(R)  are  examples.  Continued
funding  and  participation  by the  Company's  corporate  partners  under joint
development  or  licensing  agreements  will  depend  not  only  on  the  timely
achievement of research and development  objectives by the Company, which cannot
be assured,  but also on each corporate  partner's own  financial,  competitive,
marketing and strategic  considerations and overall attitude towards engaging in
outside  collaborations.  Under  several  of its joint  development  or  license
agreements,  Scios relies on its corporate  partners to conduct all or a portion
of preclinical  and clinical  trials,  to obtain  regulatory  approvals,  and to
manufacture  and  market  products.  Although  the  Company  believes  that  its
corporate  partners  will have an economic  incentive to meet their  contractual
responsibilities, the amount and timing of resources devoted to these activities
generally will be controlled by the corporate partner. The wave of mergers among
the  established  pharmaceutical  companies  over  the last  few  years  and the
downsizing and shift in research  strategy that often follows these mergers have
underscored the fact that corporate partners can change their strategy,  and may
sometimes drop entirely the  collaborations  they or their  predecessor have had
with other companies.

    All of these  factors  combine  to make drug  development  extremely  risky,
challenging and competitive.  At the same time, these factors  contribute to the
significant  rewards  and  satisfaction  that can  accrue to the  personnel  and
stockholders  of a company that  successfully  overcomes the  challenges of drug
discovery  and  development  and  succeeds  in  creating  and  marketing  a  new
pharmaceutical agent.

Products in Development
-----------------------

    NATRECOR(R)  BNP. In September, 1997,  Scios  announced  positive  Phase III
clinical  results from its pivotal  efficacy  study of  NATRECOR(R)  BNP for the
treatment  of  acute   congestive   heart  failure  (CHF).   Acute  CHF  affects
approximately  one million people  annually in the United States.  In the study,
NATRECOR(R)  produced  improvements  in  patients'  symptoms  and two  important
measures  of heart  function:  pulmonary  capillary  wedge  pressure  (PCWP) and
cardiac index. The Company plans to file an NDA (New Drug  Application) with the
Food and Drug Administration (FDA) in the first half of 1998 seeking approval in
the United States for the use of  NATRECOR(R)  for the  short-term  treatment of
CHF.

     The  randomized,   double-blind,   placebo-controlled  study  completed  in
September,  1997 was designed to  demonstrate  the efficacy of  NATRECOR(R) as a
therapy for the  short-term  treatment  of CHF.  One  hundred  and  twenty-seven
patients with acutely decompensated CHF requiring  hospitalization were enrolled
in the study.  Patients  received an infusion  of either  NATRECOR(R)  (0.015 or
0.03(mu)g/kg/min)  or placebo. The primary endpoint of the study was a reduction
in PCWP.  Secondary  endpoints  included cardiac index and symptom  improvement.
With respect to the primary  endpoint,  the analysis  indicates that NATRECOR(R)
reduced PCWP by 20%  (p=0.003) and 31% (p value is less than 0.001) in the 0.015
and 0.03(mu)g/kg/min  dose groups,  respectively,  compared to placebo.  Symptom
score and cardiac  index also  improved  compared to placebo at a  statistically
significant level.

    The Company is seeking a  commercial  partner for  NATRECOR(R).  The Company
expects to grant its partner marketing rights on a global basis,  subject to the
option of Scios to  co-promote  NATRECOR(R)  in the United  States under certain
circumstances.  Scios also intends to retain the right to manufacture and supply
NATRECOR(R) for global sales.  Discussions are currently underway with candidate
partners.  For a discussion of certain rights in NATRECOR(R)  related to its use
in another  indication,  see  "Business -- Additional  Projects --  AURICULIN(R)
anaritide."  A number of  pharmaceutical  products are already  marketed for the
treatment  of acute  CHF.  Hence,  the  Company  and any  partner  will  need to
demonstrate  positive  clinical  benefits  and an ability to continue to produce
NATRECOR(R) cost-effectively in order to successfully introduce NATRECOR(R) into
this competitive market.
<PAGE>

    This discussion of NATRECOR(R)  includes  forward-looking  statements within
the  meaning  of the  PSLRA-95,  which are based on  current  information.  Many
factors   could   influence   the  success  of  the   Company's   strategy   for
commercializing   NATRECOR(R)  and  the  commercial   success  of  the  product,
principally including the reaction of various regulatory agencies, including the
FDA,  to the data Scios has  developed  concerning  the degree of  efficacy  and
safety of NATRECOR(R), the scope of any approval such agencies may grant for the
product,  and Scios' success in selecting,  negotiating  an agreement  with, and
then  working  with a partner  to  successfully  exploit  the  opportunity.  See
"Business -- Product Development  Activities and Risks" for a further discussion
of factors  that can impact the  Company's  commercialization  of its  products,
including NATRECOR(R).

    The  Company  believes  that it was  the  first  to  discover  human  b-type
natriuretic  peptide  ("BNP"),  whose  gene it  cloned  in 1988 as a part of its
program in natural human peptides that improve heart and kidney function. BNP is
made in the heart, and preclinical  studies at the Company and elsewhere suggest
that BNP has the biological  effects of increasing  the  elimination of salt and
water from the body,  dilating  blood  vessels,  and decreasing the secretion of
other  hormones  which lead to blood  vessel  constriction  and  elevated  blood
pressure.  The Company holds issued United States and European  patents covering
human BNP, which currently expire in mid-May 2009. These patents issued to Scios
are  subject  to  possible  extension  due to time  taken  up in the  regulatory
approval process.  In addition,  all issued patents are subject to the risk that
they  may  be  challenged  by  another  entity  which  may  result  in  a  court
invalidating  or limiting the patent.  See "Business -- Patents and  Proprietary
Rights."

    FIBLAST(R)  trafermin.  FIBLAST(R)  trafermin  is Scios' form of human basic
fibroblast growth factor,  an agent that has been shown to promote  angiogenesis
(the  growth  of new  blood  vessels),  to  directly  stimulate  the  growth  of
connective  tissue,  and to  possess  certain  neuroprotective  properties,  the
mechanisms of which are not yet fully understood.  As described below,  Scios is
working with two key partners on the  development of FIBLAST(R) for a variety of
indications.

    Since 1988, Scios has worked with Kaken  Pharmaceutical Co., Ltd. ("Kaken"),
the Company's  corporate  partner for  FIBLAST(R)  in Japan.  Pursuant to a 1988
agreement,  Kaken has exclusive rights to develop and market  FIBLAST(R) for all
indications  in Japan,  Korea,  Taiwan,  Hong Kong and the People's  Republic of
China. Scios receives research and development support payments,  is entitled to
receive additional  payments as regulatory  milestones are met, and will receive
royalties on any sales of FIBLAST(R) products by Kaken. In 1994, the Company and
Kaken signed a series of agreements expanding the 1988 agreement. Under the 1994
agreements, Scios will manufacture FIBLAST(R) for the next several years for use
by Kaken. The agreements also establish a collaboration on manufacturing process
development  between the  companies  and provide  Kaken with a license to Scios'
manufacturing technology for FIBLAST(R). It is intended that at some point Kaken
will be able to manufacture  FIBLAST(R) for its own use. However, the timing for
Kaken to assume  this  responsibility  has not been  determined.  Under the 1994
agreements,  Kaken will make  payments to Scios for the supply of material,  the
process  development  collaboration,  and the  license to  FIBLAST(R)  know-how,
patents and manufacturing technology.

    Kaken  conducted two Phase III trials in Japan for  evaluation of FIBLAST(R)
in  recalcitrant  wounds.  Based on the results of these  studies,  in June 1996
Kaken filed an NDA in Japan for this  indication.  Before it may begin to market
FIBLAST(R) in Japan,  Kaken must obtain approvals from the Japanese  authorities
with respect to the NDA for  FIBLAST(R)  in the target  indication  and also for
product  pricing  in Japan.  Obtaining  these  approvals  is a  complex  process
involving  a  thorough  review of the  comprehensive  set of data that  Kaken is
required  to  submit.  Approval  for Kaken to market  the  product in Japan will
require  that the  Japanese  authorities  reach  the  conclusion  that such data
demonstrate  to  the  regulators'  satisfaction  that  FIBLAST(R)  is  safe  and
effective in the  treatment  of  recalcitrant  wounds,  and that  processes  and
facilities  used by Scios  for  manufacturing  the bulk drug  substance  used in
FIBLAST(R) are satisfactory.  Although  Japanese  regulators will apply Japanese
standards  and  practices  in reviewing  Kaken's NDA seeking  approval to market
FIBLAST(R),  Kaken  faces  many of the  same  challenges  and  factors  that are
discussed in "Business -- Product Development Activities and Risks."

    Following  the Company's  completion in 1993 of Phase II clinical  trials of
FIBLAST(R)  in the  United  States  for the  treatment  of  recalcitrant  wounds
(pressure  sores and venous statis ulcers),  the Company  determined not to fund
additional  clinical studies of FIBLAST(R) for chronic  illnesses,  except under
sponsorship of a corporate partner.  This decision was driven by the cost of the
extensive  clinical trial program expected to be required for approval of such a
product in the United  States.  To date, the Company has not entered into such a
partnership  for the  development  of  FIBLAST(R)  in the United  States for the
treatment of recalcitrant wounds.
<PAGE>

    In  1996,  Scios  signed a  Collaboration  Agreement  with the  Wyeth-Ayerst
Laboratories  division of American  Home Products  Corporation  ("Wyeth-Ayerst")
creating a joint development and commercialization program to examine the use of
FIBLAST(R) in the treatment of stroke and  cardiovascular  disorders.  Under the
terms  of  the  agreement,  Wyeth-Ayerst  and  Scios  are  collaborating  in the
development  and  commercialization  of FIBLAST(R) in North  America,  where the
companies  will  share  development   costs  and  profits.   Scios  has  granted
Wyeth-Ayerst exclusive marketing rights outside of North America and the Pacific
Rim countries  licensed to Kaken.  Scios will receive royalties on sales outside
of  North  America  and  payments  for  bulk  drug  supply  worldwide.  In 1996,
Wyeth-Ayerst  made a $12 million  upfront payment to Scios in cash and will also
pay Scios up to $32 million in milestone payments upon achievement of key future
development events. In addition, Wyeth-Ayerst has provided a $12 million line of
credit that Scios may draw upon from time to time through  December 2004 to fund
expansion of its manufacturing facility for FIBLAST(R).

    In  extensive  preclinical  studies,  FIBLAST(R)  has been  shown to protect
neurons from  damaging  effects  associated  with stroke,  including  oxygen and
glucose  deprivation,  and glutamate  release.  FIBLAST(R)  has  demonstrated  a
reduction of neuronal death in both permanent  occlusion and reperfusion  animal
models of stroke.  Early in 1996,  Scios began a Phase I/II study of  FIBLAST(R)
for the  treatment  of stroke.  This  study was  concluded  in 1997,  ultimately
enrolling 66 patients and further  demonstrating  the safety of FIBLAST(R) after
systemic  administration.  In 1997,  Wyeth-Ayerst  assumed the responsibility of
lead development party for FIBLAST(R) in stroke.  In October,  1997, the Company
and  Wyeth-Ayerst  announced  the  initiation  of two  900-patient  Phase II/III
clinical  trials of  FIBLAST(R)  in stroke.  These  studies are being  conducted
principally in the United States and Europe.

    Scios  has  also  demonstrated  in  preclinical   studies   FIBLAST(R)'s
potential  to increase  blood flow to  peripheral  blood  vessels and reduce the
complications of peripheral  vascular disease ("PVD") through  angiogenesis,  or
the  growth  of new  blood  vessels.  Scios is the lead  development  party  for
FIBLAST(R) in PVD and a Phase II clinical trial has recently been initiated.  In
a clinical study in collaboration with researchers at the National Institutes of
Health,  Scios and  Wyeth-Ayerst  are  exploring  the potential of FIBLAST(R) to
increase  blood flow to the heart in  patients  with  advanced  coronary  artery
disease. The purpose of this study is to explore the possibility or reducing the
need for bypass  surgery  through the  patient's  growth of new blood vessels to
supply the heart.

    Scios has also granted llicenses under its FIBLAST(R) patents and technology
to  companies working to develop products in other areas.  These include a non-
exclusive license to Orquest, Inc., a company developing products for the treat-
ment of bone fractures, and a license to Prizm Pharmaceuticals, Inc., a company
using bFGF for the trageted delivery of other pharmaceutical  agents.  Scios is
supplying Orquest with FIBLAST(R) for incorporation into Orquest's product.

    Scios is obligated  to make  payments to Organon  International  ("Organon")
based  on  amounts  received  by Scios  upon  commercialization  of  FIBLAST(R).
Approximately $731,000 remains to be paid under the obligation, which stems from
the  Company's  1989  reacquisition  of  certain  FIBLAST(R)  rights  previously
licensed  to  Organon.   The  basic   research  on  FIBLAST(R)   was  funded  by
Biotechnology  Research  Partners,  Ltd.  See Note 11 of  Notes to  Consolidated
Financial Statements.  See also "Business -- Patents and Proprietary Rights" for
a discussion of FIBLAST(R) patent issues.

    Discovery Research. The Company also has conducted discovery research,  both
on its own and in collaboration  with other companies,  to identify other agents
for development or new applications for agents under  development by the Company
for other  indications.  The current focus of Scios'  research  effort is on the
discovery  of agents for  cardiorenal  applications  and on agents to prevent or
delay the onset of Alzheimer's disease.

    Cardiorenal Disease.

    Vascular Endothelial Growth Factor. Scios is conducting pre-clinical studies
of the 121  amino  acid  form  of VEGF  (VEGF-121),  another  potent  angiogenic
substance.  The company has shown that  VEGF-121 is effective in an animal model
of  peripheral   vascular   disease   following   several   different  modes  of
administration.  Scios also  intends to explore the  possible use of VEGF-121 in
coronary  artery  disease.  The Company has granted a license to GenVec Inc. for
the use of the gene encoding VEGF-121 in gene therapy paradigms. GenVec recently
entered  phase  I  clinical  testing  of  VEGF-121  gene  therapy  in  the US in
collaboration  with Parke-Davis.  Scios has been awarded US and European patents
covering VEGF-121.  Other companies hold patents on competing forms of VEGF.
<PAGE>

    Serine  Protease  Inhibitors.   Scios  has  designed  novel  variants  of  a
polypeptide Kunitz-type serine protease inhibitor and has filed patents on these
compounds.  A  series  of  these  compounds  inhibit  key  enzymes  involved  in
inflammatory   and  coagulation   disorders.   Scios  is  currently   conducting
pre-clinical  testing  of these  compounds  in  animal  models  associated  with
excessive inflammation as a prelude to possible clinical development.

    Cardiac  Disease  Genomics.  The Company is conducting  research to discover
novel genes that are functionally relevant to cardiac diseases.  The Company has
assembled  a series  of  technologies  to assist  in the  identification  of new
therapeutic factors and targets for drug discovery.  The Company is working with
Synteni, a subsidiary of Incyte Pharmaceuticals, Inc., to analyze the expression
of cardiac  genes on DNA chips.  Scios is also a member of the  DiscoverEase(TM)
program,  which has been  developed  by Genetics  Institute,  Inc. to define the
function of novel secreted proteins.

    Alzheimer's  Disease.  For over 10 years, the Company has conducted research
to  develop  new  therapies  for  Alzheimer's  disease  primarily  based  on the
investigation of the B-amyloid precursor protein.  During this time, the Company
has collaborated  with a variety of pharmaceutical  company  partners.  In 1997,
Scios formed  separate  research  collaborations  with Eli Lilly and Company and
with The DuPont Merck Pharmaceutical  Corporation.  Each of these collaborations
provides  funding to Scios for the  research it  conducts,  potential  milestone
payments to Scios by the partner if certain events are achieved and the right of
the partner to commercialize  resulting  products subject to royalty payments to
Scios.

    Previously,  Scios had a research  alliance  with Marion  Merrell Dow,  Inc.
("MMD")  which  merged  with  Hoechst  Roussel  in 1995 to form  Hoechst  Marion
Roussel,  Inc.  ("HMR").  HMR terminated the collaboration in 1996, and in early
1997, the parties  clarified  certain issues concerning the rights of each party
to use  the  technology  developed  in  the  program.  Among  other  terms,  the
resolution  included  certain  payments  by  HMR to  Scios.  HMR's  decision  to
terminate  its  collaboration  with the Company  represents  an example of how a
change in the priorities of a corporate sponsor,  such as HMR, can impact Scios.
This risk is discussed in the section "Business -- Product Development  Activity
and Risks."

Additional Projects
-------------------

    The Company has from time to time  pursued  product  development  activities
outside of the focus areas described above, some of which programs are discussed
below. In the past, Scios divested or otherwise  leveraged certain  technologies
that were not central to its long-term  business strategy and may continue to do
so in the future. Some of these programs are discussed below.

    Insulinotropin.  The  Company  initially  developed  insulinotropin  under a
collaboration  begun with Pfizer Inc.  ("Pfizer") in 1988.  After several years,
Pfizer assumed responsibility for clinical development.  As part of that effort,
Pfizer  initiated a  collaboration  with Novo  Nordisk  A/S of Denmark,  a world
leader in  insulin  and  diabetes  care  products.  In 1996,  Pfizer  elected to
terminate  its  license  from Scios on  insulinotropin.  Following a three month
review of the  product,  Novo Nordisk  acquired an exclusive  license from Scios
under a new  agreement  providing  for Scios to  receive  from Novo  Nordisk  an
upfront  payment,  potential  milestone  payments based on time and events,  and
royalties on product  sales.  Novo Nordisk is now  responsible  for  development
activities  for  insulinotropin.  Insulinotropin  appears to be a potent peptide
that stimulates  insulin release when blood sugar levels are above normal.  Type
II diabetics do not release  enough insulin from the pancreas when blood glucose
levels  rise in response  to eating a meal and they  become  progressively  more
resistant  to insulin  action in  stimulating  glucose  uptake by muscle and fat
tissue.  Insulinotropin  controls  blood glucose  levels in Type II diabetics by
stimulating  insulin  release  and  perhaps by  overcoming  insulin  resistance.
Present  therapies for Type II diabetics  include  insulin  injections  and oral
hypoglycemic  agents,  which can induce  dangerously low blood sugar levels.  If
insulinotropin stimulates insulin release only when blood sugar levels are above
normal, it may have a lower risk of this serious side effect.  The Company holds
an exclusive license to patent applications covering  insulinotropin and certain
analogs held by Massachusetts  General  Hospital,  which rights were licensed to
Novo Nordisk.

    BNP Diagnostic.  Third-party  researchers  have determined that the level of
circulating brain natriuretic peptide (BNP) may be a good basis for a diagnostic
to identify and track patients  suffering from congestive  heart failure.  Scios
has  licensed  to  Shionogi  and Co.,  Ltd.  ("Shionogi")  the  right  under the
Company's  patent  position  on BNP to develop  diagnostic  products in Japan in
exchange  for  royalties  on  product  sales.  Shionogi  began  selling  its BNP
diagnostic in Japan in 1996. In 1997,  Scios granted  Shionogi the right to sell
its  radioimmunoassay  (RIA)-BNP  diagnostics in Europe.  Scios has also granted
Abbott Laboratories and Biosite Diagnostics Incorporated the nonexclusive rights
under the Company's BNP patents to develop BNP diagnostics in the United States,
and  the  Company  is now  seeking  to  enter  one  more  license  agreement  to
commercialize the diagnostic  application of its BNP patent rights in additional
territories.
<PAGE>

    CNS   Disorders;   Guilford   Pharmaceuticals.   In  June   1994,   Guilford
Pharmaceuticals Inc. ("Guilford"),  at that time a majority-owned  subsidiary of
the Company, completed an initial public offering of $15 million of common stock
to pursue the  development  of  pharmaceutical  products  for the  treatment  of
diseases of the central  nervous system  ("CNS").  Following  subsequent  equity
offerings  by  Guilford  and Scios'  sale of a portion of its  holdings,  Scios'
ownership  interest  in  Guilford  is  currently  approximately  7%.  Scios  had
previously  transferred to Guilford  certain  neuroscience  technology,  and had
licensed to Guilford the  GLIADEL(R)  implant  project and related drug delivery
technology  described  below for  application  in the treatment of tumors of the
central nervous system and cerebral edema ("Guilford Field").  The most advanced
Guilford  product is GLIADEL(R),  which was approved for marketing in the United
States in 1996.

    Drug Delivery Systems. Prior to Scios' acquisition of Nova in 1992, Nova had
been developing  certain drug delivery  systems.  Its two most advanced projects
were the  GLIADEL(R)  implant to treat primary brain cancer and the  SEPTACIN(R)
implant for the  treatment of  osteomyelitis,  a serious bone  infection.  These
projects were developed  pursuant to a license  agreement with the Massachusetts
Institute  of  Technology  ("MIT")  relating to MIT's  BIODEL(R)  drug  delivery
technology.  As noted above, the Company licensed a portion of the drug delivery
technology,  including GLIADEL(R), to Guilford. In 1994, the Company licensed to
another third party the drug delivery technology, including SEPTACIN(R), for all
uses outside the Guilford Field. Scios thereafter assigned its BIODEL(R) license
rights back to MIT, which will administer  these  licenses.  The Company and MIT
will receive  royalty and milestone  payments under the license  agreements with
Guilford and the other  licensee as products are  developed.  The  licensees are
also obligated to meet certain  diligence  standards in pursuing  development of
their respective  product  candidates.  The GLIADEL(R) and SEPTACIN(R)  projects
were undertaken by the Company on behalf of Nova Technology Limited Partnership,
the limited  partnership  that funded Nova's  research and  development on these
projects.  See Note 11 of  Notes  to  Consolidated  Financial  Statements  for a
description of the Company's payment obligations to former limited partners.

    AURICULIN(R)  anaritide.  AURICULIN(R)  is a  synthetic  version  of a human
hormone,  atrial natriuretic peptide ("ANP"), which is produced in the heart and
has a range of biological  activities  known to be important in kidney and heart
function,  including increasing the elimination of water and salt from the body.
ANP improves kidney function by increasing  blood flow into the filtration units
of the kidney and restricting  blood outflow.  On December 30, 1994, the Company
entered into a  Collaboration  Agreement (the  "Collaboration  Agreement")  with
Genentech,   Inc.   ("Genentech")   relating  to  the  joint   development   and
commercialization  of  AURICULIN(R)  for use in the  treatment  of acute  rental
failure  ("ARF").  In  1997,  Scios  and  Genentech  suspended   development  of
AURICULIN(R)  in ARF. Under the  Collaboration  Agreement,  the Company bore the
development  costs of  AURICULIN(R)  and  Genentech  will have  certain  options
described  below  because the Company  will not file a NDA for  AURICULIN(R)  by
December 31, 1998.  These options  include (i) electing to bring  NATRECOR(R) or
another  natriuretic  peptide  product  under  development  by  Scios  into  the
Collaboration  Agreement for use in the treatment of ARF or (ii) terminating the
Collaboration Agreement.  This option could limit the Company's ability to enter
into collaborative  arrangements on NATRECOR(R) or any other natriuretic peptide
product until the  expiration of such  deadlines.  If Genentech were to elect to
bring a product into the Collaboration  Agreement in place of AURICULIN(R),  the
milestone payments due with respect to such product would be reduced by one-half
from the payments that would have been due upon the successful commercialization
of AURICULIN(R).

    Concurrent with the signing of the Collaboration  Agreement,  Genentech made
(i) a $20  million  equity  investment  in Scios by  purchasing  a new  class of
nonvoting  preferred stock, all of which has now converted to outstanding common
stock,  and (ii) a $30 million loan  commitment,  which the Company drew down in
1997. See Note 3 of Notes to Consolidated Financial Statements.

Marketing and Sales
-------------------

    Once they have been approved for marketing,  the Company  ultimately intends
to promote certain of its proprietary  products in the United States through its
own sales force for some or all approved indications.  This could be done by the
Company  alone or jointly  with its  commercial  partner  for any such  product.
Presently, Scios generates revenues by marketing products that were developed by
others.
<PAGE>

    Third-Party  Products.  The Company has a sales  force of  approximately  90
representatives  who are  employed  exclusively  by the  Company  and  work on a
part-time basis marketing psychiatric products. The Company currently markets in
the United  States four  psychiatric  products  under  license  from  SmithKline
Beecham  Corporation  ("SB")  and  co-promotes  two  other  products:  HALDOL(R)
Decanoate  (haloperidol),  a depot injection product to treat schizophrenia that
is distributed by Ortho-McNeil Pharmaceutical ("Ortho-McNeil"),  an affiliate of
Johnson & Johnson,  and EFFEXOR(R)  (venlafaxine HCl), an antidepressant that is
marketed by Wyeth-Ayerst. Since 1993, the Company has jointly promoted HALDOL(R)
with Ortho-McNeil for the treatment of schizophrenia.  Under the agreement,  the
Company  receives  quarterly  payments  based  on total  sales  of the  product.
Ortho-McNeil  manufactures and distributes HALDOL(R),  and generally indemnifies
Scios against  product  liability  claims.  The agreement with  Ortho-McNeil  is
expected  to end in 1998.  In  1996,  Scios  and  Wyeth-Ayerst  entered  into an
agreement regarding Scios' promotion of EFFEXOR(R) to selected  psychiatrists in
the United States.  Under the agreement with Wyeth-Ayerst,  Scios is compensated
based on increases in prescriptions  written by the  psychiatrists to whom Scios
promotes.  Wyeth-Ayerst  manufactures and distributes EFFEXOR(R),  and generally
indemnifies Scios against product liability claims.

    The Company has exclusive  rights to market the following SB products in the
United States:  ESKALITH(R)  and ESKALITH  CR(R)  (lithium) for the treatment of
manic  depressive  illness,   THORAZINE(R)   (chlorpromazine)  and  STELAZINE(R)
(trifluoperazine)   for  the   treatment  of   schizophrenia,   and   PARNATE(R)
(tranylcypromine)  for  the  treatment  of  depression  (collectively,  the  "SB
Products").  SB currently  manufactures and distributes the SB Products.  SB may
discontinue manufacturing one or more of the products if it gives the Company at
least 12 months' notice,  in which case Scios has the right to manufacture  such
product(s). SB is responsible for all ancillary matters relating to sales of the
SB Products (including various  administrative tasks) and for the maintenance in
good standing of all new drug applications with respect to the SB Products.  The
agreement  also  grants  Scios  certain  rights to  indemnification  from SB for
product liability claims.  The Company is obligated to spend certain amounts for
marketing  support  based on the prior  year's net sales and to reimburse SB for
certain  third-party  royalty  payments.  Scios pays SB 40% of the Company's net
profits (as defined in the Company's agreement with SB) from United States sales
of the SB Products. See Note 3 of Notes to Consolidated Financial Statements.

    HALDOL(R),  EFFEXOR(R)  and the SB Products  all face  competition  which is
likely to become greater over time. For the SB Products, unit volume for certain
products  has been  eroding  and can be  expected  to  continue  to erode due to
competition from generic products sold at  substantially  lower prices.  Generic
competition for HALDOL(R) is expected to be launched in the United States during
1998.  This  competition  is  likely  to cause  rapid  erosion  of the  sales of
HALDOL(R).  If generic  competition  is launched,  the Company  expects that its
HALDOL  arrangement  with  Ortho-McNeil  will end. Scios is seeking  replacement
products to market for others.  These statements are forward-looking  within the
meaning of the  PSLRA-95.  Numerous  factors  will  influence  the  impact  that
competitive  products will have on the  Company's  revenues from the SB Products
and the Company's co-promotion activities.  These factors include the success of
the Company's and its partners' marketing strategies and efforts, the actual and
perceived features of competing products,  the amount of the difference in price
of competing  products,  and the marketing  effort by third parties on competing
products.  Although  past  decreases in unit sales of the SB Products  have been
partially offset by price  increases,  there can be no assurance that the market
will accept any additional price increases.  Among the SB Products,  the Company
has placed particular marketing emphasis on those product formulations,  such as
ESKALITH CR(R) (a controlled release formulation), where generic equivalents are
less available.

    Although  the Company is seeking to acquire  the right to market  additional
products,  numerous factors will determine  whether and when the Company is able
to do so and  then  the  degree  to  which  the  Company  realizes  net  revenue
contribution from marketing such additional  products.  Factors  influencing the
availability  of such  additional  products  on terms  favorable  to the Company
include  the  ability of the Company to  demonstrate  success  under its current
agreements,  the  willingness of other  companies to enter into such  agreements
with the Company,  which will be based in part on where such companies  elect to
deploy their own  marketing  resources,  and  competition  from other  companies
offering marketing assistance similar to that offered by the Company.

    Proprietary  Products.  The  Company  ultimately  plans  to  participate  in
marketing  certain of its proprietary  products in the United States when and if
approved  by the FDA.  In the  case of  NATRECOR(R),  the  Company  expects  its
commercial  partner to promote  NATRECOR(R)  in the United States on its own for
the first  several  years and for the  Company  to have the  option to begin its
co-promotion  alongside the partner upon certain  events or the passage of time.
This  section on  Proprietary  Products  describes  some of the  challenges  the
Company will face in developing  the capability to market  successfully  its own
products. This discussion necessarily contains forward-looking statements within
the  meaning of the  PSLRA-95.  These  forward-looking  statements  are based on
current  expectations,  and the  Company  assumes no  obligation  to update this
information.  Numerous  factors,  including those discussed  below,  could cause
actual  results  to  differ  from  those  described  in  these   forward-looking
statements.  Under  certain  circumstances,  the Company could abandon its plans
eventually  to market  certain of its own products in the United States in favor
of granting  outright  licenses of its products and technology.  The Company has
pursued  (and  expects  to pursue  for the  foreseeable  future) a  strategy  of
entering into licensing  arrangements  with other companies as the means to make
its products available outside of the United States.
<PAGE>

    Scios believes that its experience in marketing  third-party  products under
arrangements  such as those  described above will prove useful as it prepares to
market its own products.  However, to date, Scios' marketing experience has been
limited to  psychiatric  products,  and the Company does not  currently  have in
place all of the resources to market the products it is seeking to develop.  The
commercialization  of the  Company's  major  products  will require  significant
financial resources, as well as sales, marketing and distribution  capabilities.
In order to provide funds and expertise to meet these requirements, particularly
outside of North  America,  the Company will consider  entering into  additional
corporate partnerships with established pharmaceutical companies, as it has with
Wyeth-Ayerst  for the  promotion  of  FIBLAST(R)  for stroke and  cardiovascular
disorders. There can be no assurance that the Company will be able to enter into
such  partnerships on favorable terms or develop such a marketing  capability on
its own.  Scios  believes  that such  collaborations  may enable it to speed the
timing of  product  launch and  increase  market  penetration  of  selected  new
therapies.  However, such a partnering  arrangement could also result in a lower
level of income to Scios than if it marketed the  products  entirely on its own.
See "Business -- Product Development Activities and Risks."

    The Company's ability to commercialize its products  successfully may depend
in part on the extent to which  reimbursement  for the cost of such products and
related  treatment  will be  available  from  government  health  administration
authorities,   private  health  coverage   insurers  and  other   organizations.
Government and other third-party  payors are increasingly  attempting to contain
healthcare  costs by limiting both coverage and the level of  reimbursement  for
new  therapeutic  products.  Market  acceptance  of  Scios'  products  would  be
adversely  affected  if  adequate  coverage  and  reimbursement  levels  are not
provided  for  approved  uses  of  Company  products.  In  addition,  in view of
expressed  governmental  concerns over drug prices and other  healthcare  costs,
there can be no  assurance  that  future  government  and private  cost  control
initiatives  will not adversely  affect the Company's  ability to maintain price
levels  on  its  products   sufficient  to  realize  an  appropriate  return  on
development efforts.

Manufacturing
-------------

    Scios has  concentrated  its resources on product  discovery and development
prior to investing  substantially  in  manufacturing  capability.  To date,  the
Company has produced  only the bulk active  ingredient  in FIBLAST(R) in its own
facility  and relies on third  parties for the  manufacture  of other  products,
including  NATRECOR(R)  and the final  product form of  FIBLAST(R).  Scios has a
production  facility  which it  believes  enables it to produce  the bulk active
ingredient of FIBLAST(R)  and  potentially  other products for itself and others
under requirements for current Good Manufacturing  Practices ("cGMP").  However,
the  Company  does not  currently  possess the staff or  facilities  that may be
necessary to manufacture  any product in the commercial  quantities  that may be
required  in  the   long-term.   The   strategy   of   building   or   acquiring
commercial-scale  manufacturing  facilities or utilizing third-party  facilities
only as the need  arises  carries  with it  certain  risks,  as there  can be no
assurance that such  facilities can be built,  acquired or used on  commercially
acceptable terms or that Scios will be able to meet  manufacturing  quantity and
quality  requirements  through the use of such  arrangements.  Having a low-cost
manufacturing  capability  for  NATRECOR(R)  and smoothly  managing  third-party
manufacturers  are  expected  to  be  keys  to   commercializing   this  product
successfully and on a timely basis.  Failure to do so could adversely impact the
commercial success of the product. See "Business -- Competition."

    To the  extent  Scios has from time to time had  capacity  available  in its
production facility,  it has performed contract  manufacturing for third parties
and the Company has  produced for  third-party  customers  pharmaceutical  grade
supplies of products of interest to such third  parties.  The Company may engage
in similar work in the future.

    Ortho-McNeil  manufactures HALDOL(R),  Wyeth-Ayerst  manufactures EFFEXOR(R)
and SB manufactures the SB Products. If SB were to discontinue manufacturing the
SB Products and the Company wished to continue selling the products, the Company
would have to develop  additional  facilities to manufacture  independently on a
large scale or enter into an arrangement  with a third party to manufacture such
products. See "Business -- Marketing and Sales."
<PAGE>

Patents and Proprietary Rights
------------------------------

    Scios is seeking patent  protection for proprietary  technology and products
in the United States and abroad to prevent others from unfairly  capitalizing on
its investment in research.  Other companies engaged in research and development
of new health care products based on  biotechnology  also are actively  pursuing
patents for their technologies,  which they consider to be novel and patentable.
Scios also relies and will  continue to rely upon trade  secrets and know-how to
develop  and  maintain  its  competitive  position.  There can be no  assurance,
however, that others will not develop similar technology or that confidentiality
agreements on which the Company relies to protect trade secrets will be honored.

    The Company  currently owns or holds exclusive  rights to  approximately  57
issued United States patents and 27 United States  pending  patent  applications
covering its proprietary technology and products. The Company also files foreign
applications  corresponding  to most of its United States  applications.  Scios'
issued patents include patents on NATRECOR(R),  FIBLAST(R),  and insulinotropin.
The Company's patent position with respect to certain  principal  products under
development  is described  above in the section  discussing  each  product.  See
"Business -- Product Development Activities and Risks." If a patent issues prior
to marketing  approval,  as has been the case with all of the  Company's  issued
patents to date,  Scios can apply for extension of the patent term for a limited
period  of  time  to  make  up for a  portion  of the  patent  term  lost to the
regulatory  approval  period.  The  actual  period of the  extension  varies but
generally  cannot exceed five years. In certain of its  third-party  agreements,
the absence of a patent  covering a product  licensed by Scios could  reduce the
royalties due to the Company under the agreements.

    This  section   entitled   "Patents   and   Proprietary   Rights"   contains
forward-looking   statements  under  the  PSLRA-95.  Actual  results  will  vary
depending on numerous  factors,  many of which are discussed.  Investors  should
appreciate that the patent position of biotechnology and pharmaceutical firms is
generally  highly  uncertain and involves  complex legal and factual  questions.
Although  Scios  believes  it has  strong  patent  positions  on  certain of its
products,  there can be no  assurance  that any  patent  will  issue on  pending
applications  of the Company,  or that any patent issued will afford the Company
significant  commercial  protection  against  competitors  for the technology or
product  covered by it, or that patents  will not be infringed  upon or designed
around.  Third parties have filed  applications for, or have been issued patents
relating to,  products or  processes  which are similar to or  competitive  with
certain of the Company's  products or processes.  Scios is incurring and expects
to  continue  to incur  substantial  costs in  interference  proceedings  and in
defending the validity or scope of its patents or in challenging the validity or
scope of competing patents. The Company is unable to predict how the courts will
resolve issues  relating to the validity and scope of such patents.  If any such
patent were to be interpreted  to cover any of the Company's  products and could
not be  licensed,  circumvented  or shown to be  invalid,  the results of Scios'
future  operations could be materially and adversely  affected.  Described below
are patent positions of other companies of which Scios is aware that potentially
overlap the Company's principal product development areas discussed above.

    NATRECOR. Scios has been issued United States, European and Japanese patents
covering  human BNP. As  opposition  proceeding  has been filed  against  Scios'
Japanese  patent.  Scios is aware that Daiichi  Pharmaceutical  Co., Ltd., Tokyo
("Daiichi")  has filed patent  applications on porcine BNP in Japan and on human
BNP worldwide.  The filing dates of the Daiichi applications  covering human BNP
are later than those of the Company. On July 12, 1995 the European Patent Office
issued a patent to Daiichi containing claims that overlap with certain claims of
Scios' issued European patent.  Scios filed an opposition to the Daiichi patent.
On February 3, 1998,  the  Opposition  Division of the  European  Patent  Office
issued a ruling  upholding  the validity of the Daiichi  patent.  Scios plans to
appeal this ruling. If Scios does not succeed in invalidating the Daiichi patent
through the appeal proceeding or in subsequent legal proceedings, Scios' ability
to develop NATRECOR(R)  commercially in Europe might be hindered or prevented if
it were unable to obtain a license.

    FIBLAST(R). In February 1991, a United States patent with one claim covering
a form of fibroblast  growth  factor (FGF) protein was issued to Synergen,  Inc.
("Synergen"),  which was later  acquired  by Amgen Inc.  In June 1991,  a United
States  patent  with one  claim  covering  the DNA for the same  form of FGF was
issued  to  Synergen.  Based on a  review  of the  publicly-available  documents
relating to these  patents,  Scios believes that the Synergen form of FGF or DNA
differs  from the form of FGF  produced  by the  Company.  On  August  8,  1995,
following a decision favorable to Scios in a patent interference proceeding with
the Salk  Institute for  Biological  Studies  ("Salk"),  Scios received a United
States patent covering DNA sequences, expression vectors and microorganisms used
in the recombinant production of human basic FGF. On May 7, 1996, Scios received
a United States patent covering the  recombinant  production of human basic FGF.
On  February  18,  1997,   Scios  received  a  United  States  patent   covering
recombinantly produced human basic FGF.
<PAGE>

    In October 1992, a United  States  patent was issued to Salk which  contains
claims  directed to  substantially  pure mammalian  basic FGF containing the 146
amino acid  sequence  of bovine  basic FGF or a naturally  occurring  homologous
sequence  of  another  mammalian  species.  If any  claim  of this  patent  were
determined  to be valid and  construed  to cover  Scios'  human  basic FGF,  the
Company's ability to develop basic FGF might be hindered or prevented if it were
unable  to  obtain  a  license.   Scios'   outside   counsel  has  reviewed  the
publicly-available  documents  relating  to the Salk  patent.  Based  upon  this
review, such counsel has opined that, to the extent any claims of the patent may
be  interpreted to cover human basic FGF, such claims are overly broad and would
likely be held invalid by an informed court.

    In May 1994, the European Patent Office issued European Patent No. 0 248 819
to Scios  covering  recombinantly-produced  trafermin,  Scios' form of basic FGF
known  by the  product  name  FIBLAST(R).  An  opposition  proceeding  has  been
instituted  against this patent by Chiron Corp.  and  Pharmacia  S.p.A.  In June
1996, the Opposition  Division of the European Patent Office upheld the validity
of the Scios patent;  however,  the opponents  have filed an appeal against this
ruling.  In August 1994, the European Patent Office issued European Patent No. 0
228 449 to Salk  covering the 146 amino acid  sequence of bovine basic FGF or an
equivalent or analog thereof. The Company filed an opposition to this patent and
in September,  the Opposition  Division  revoked the patent;  however,  Salk has
filed an appeal against this ruling. The results of these opposition proceedings
cannot be predicted with certainty.

    In March 1994, the Company obtained a non-exclusive license to make, use and
sell  FIBLAST(R)  under a United  States  patent  issued to  Harvard  University
containing  claims to purified cationic (basic) FGF. The Harvard patent is based
on a patent  application having a filing date earlier than the application which
formed the basis for the Salk patent.

    Trademarks.   NATRECOR(R),   FIBLAST(R)  and  AURICULIN(R),  are  registered
trademarks of Scios. ESKALITH(R), ESKALITH CR(R), THORAZINE(R), STELAZINE(R) and
PARNATE(R) are registered  trademarks of SB. HALDOL(R) is a registered trademark
of  McNeilab,  Inc.  EFFEXOR(R)  is  a  registered  trademark  of  Wyeth-Ayerst.
GLIADEL(R)  is the  registered  trademark of  Guilford.  Approval of the generic
compound name used with  NATRECOR(R) -- nesiritide  citrate -- is pending before
USAN.

Competition
-----------

    Competition  is intense in the  development of  biopharmaceutical  products,
particularly  in  the  development  of  products   through  the  application  of
biotechnology.  There  are  numerous  companies  and  academic  research  groups
throughout the world engaged in similar  research and  development.  Some of the
Company's competitors,  including some of its licensees, are working on products
similar  to  those  being  developed  by  Scios.  Many of these  companies  have
substantially  greater  financial,  marketing and human resources than Scios. In
the case of  NATRECOR(R),  a number of  products  are already  marketed  for the
treatment of acute CHF.  Hence,  the Company will need to  demonstrate  positive
clinical   benefits   and  an  ability  to  continue   to  produce   NATRECOR(R)
cost-effectively  in order  to  successfully  introduce  NATRECOR(R)  into  this
competitive market. FIBLAST(R) and VEGF121 face potential competition from other
growth factors.

    There  can be no  assurance  that  technological  developments  or  superior
marketing  capabilities  possessed by competitors will not materially  adversely
affect the commercial potential of the Company's products.  In addition,  if the
Company  commences  significant  commercial  sales  of  products,  manufacturing
efficiency and marketing  capability  are likely to be  significant  competitive
factors.  With respect to products no longer covered by patents,  such as the SB
Products  and  HALDOL(R),  Scios  faces,  or expects to face,  competition  from
companies offering generic products.

    The Company  believes  that the  competitive  success of the Company will be
based  primarily  on  scientific  and  technological   superiority,   managerial
competence in identifying and pursuing opportunities,  operational competence in
developing,  protecting,  producing and marketing products, and obtaining timely
regulatory agency approvals and adequate funds. Achieving success in these areas
will  depend  on the  Company's  ability  to  attract  and  retain  skilled  and
experienced personnel,  to develop and secure the rights to advanced proprietary
technology and to exploit  commercially  its technology prior to the development
of  competitive  products by others.  Scios expects that there will be continued
competition for highly qualified scientific, technical and managerial personnel.
This section entitled Competition contains forward-looking statements within the
meaning of the PSLRA-95.  Numerous  factors,  including  the factors  identified
above,  could  cause  actual  results to differ  from those  described  in these
forward-looking statements.
<PAGE>

Government Regulation
---------------------

    The  industry  in which the  Company  participates  -- the  development  and
marketing of pharmaceutical products -- is heavily regulated. As is true for all
companies  developing  pharmaceuticals,  the Company's  research and development
activities  and the  production  and  marketing  of its  products are subject to
extensive   regulation   for  safety  and  efficacy  by  numerous   governmental
authorities  in the United  States and other  countries.  This  regulation  is a
significant  factor in the  production  and marketing of the products  resulting
from  Scios'  research  and  development  activities.  Testing,  production  and
marketing of  pharmaceutical  products for human use require approval of the FDA
and  comparable  authorities  in other  countries.  Over the next several years,
Scios expects to increase  substantially its internal resources and expenditures
to meet these  requirements for the products it is developing.  See "Business --
Product Development Activities and Risks."

    The procedure for seeking and obtaining the required governmental  approvals
for a new  product  involves  many  steps,  beginning  with  animal  testing  to
determine safety and potential toxicity.  In addition,  extensive human clinical
testing is required to demonstrate the efficacy, optimal dose and safety of each
product.  The time and  expense  required  to perform  clinical  testing can far
exceed the time and expense of developing the product prior to clinical testing.
Whether  undertaken by the Company or its  commercial  partners,  the process of
seeking  and  obtaining  these  approvals  for a new product is likely to take a
number of years and  involves  the  expenditure  of  substantial  resources.  In
addition,  there can be no assurance  that any of the  Company's  products  will
obtain the  necessary  approvals on a timely  basis,  if at all. The  regulatory
environment  is  constantly  evolving and one of the demands on companies in the
pharmaceutical  industry is to take account of and  anticipate  these changes in
order to minimize  negative  impact on the  Company or its  product  development
timelines.  As a  developer  of  pharmaceutical  products,  the  Company and its
commercial   partners  must  also  deal  with   differences  in  the  regulatory
requirements  of  different  countries.  Although  there is an effort at greater
harmonization of regulatory  standards,  differences still impact whether and in
what time frame a product may be approved in a  particular  country,  if at all.
Because of these differences between countries, approval in one country does not
assure approval in another.

    Even if initial FDA approval is obtained for a product,  further studies may
be required to provide additional data on safety or to gain approval for the use
of a product as a treatment for clinical  indications other than those initially
targeted.  Moreover,  the FDA may  reconsider its approval of any product at any
time and may withdraw such approval. In addition,  before the Company's products
can be marketed in foreign countries, they are subject to regulatory approval in
such  countries  similar to that  required  in the United  States.  Accordingly,
numerous  factors  will  impact the timing,  extent and value of any  regulatory
approvals that may be obtained for the Company's products,  including changes in
regulatory requirements, which may either decrease or increase the burden on the
Company,  the level of side  effects  exhibited  by the  Company's  products  as
compared to their beneficial effects,  the availability of adequate resources to
regulatory  agencies which will impact the speed of regulatory  review,  and the
price the Company is able to charge for its products.

    FDA  regulations  require  that any drug to be tested in humans  must be
manufactured  according to cGMP  regulations.  This has been extended to include
drugs that will be tested for safety in  animals,  in support of human  testing.
The cGMPs set certain minimum  requirements for procedures,  record-keeping  and
the physical characteristics of the laboratories used in the production of these
drugs.  In  addition,  various  federal,  state and local  laws and  regulations
relating to safe working conditions,  laboratory practices, the experimental use
of animals,  and the  storage,  use and  disposal of  hazardous  or  potentially
hazardous  substances,  including  radioactive  compounds and infectious disease
agents,  used in  connection  with  the  Company's  research  work are or may be
applicable to such  activities.  They include,  among others,  the United States
Atomic  Energy Act,  the Clean Air Act,  the Clean Water Act,  the  Occupational
Safety  and  Health  Act,  the  National  Environmental  Policy  Act,  the Toxic
Substances Control Act, and the Resource Conservation and Recovery Act, national
restrictions on technology transfer, import, export and customs regulations, and
other present and possible future federal, state and local regulations. Although
the Company  believes that its safety  procedures  for handling and disposing of
hazardous materials comply with prescribed  regulations,  the risk of accidental
contamination  or injury from these materials  cannot be completely  eliminated.
The  Company  may also  incur  substantial  costs to comply  with  environmental
regulations  if  the  Company  develops  additional  manufacturing  capacity  or
otherwise changes its operations. For example, in connection with the closure of
its Baltimore  research and  development  facility in 1994 to  consolidate  such
activities  at its  California  headquarters,  the  Company  incurred  costs  of
approximately  $370,000  for  chemical  disposal,  storage  and  related  costs.
Furthermore,  the Company employs third-party contractors that it believes to be
reliable to perform  certain work in  connection  with the disposal of hazardous
materials  generated in the  Company's  research in compliance  with  applicable
laws.  Notwithstanding such reliance, the Company may remain responsible for the
materials and the actions of its  contractors  related to such  materials.  From
time to time, the Company has been notified that certain of its  contractors may
not have disposed of such materials in full  compliance with applicable laws and
that the  Company may be required  to  contribute  to the cost of  environmental
clean-up efforts.  See Item 3 below and Note 10 of Notes to Consolidated
Financial Statements.
<PAGE>

Employees
---------

    The Company had 350  employees as of December  31,  1997,  of which 210 were
engaged in research,  product and  clinical  development  and 92 were  part-time
employees (primarily its sales force).

Item 2.  PROPERTIES

    The Company's headquarters facility in Mountain View,  California,  consists
of three  buildings  owned by the  Company and land  occupied  under a long-term
ground lease. The ground lease rates are fixed through July 2010. Future minimum
ground lease payments over the next five years total approximately $937,000. The
three buildings represent 98,000 square feet of office and laboratory space. The
Company  presently  occupies  approximately  88,000  square  feet and leases the
remaining  space.  The  Mountain  View  facility  includes a 13,000  square foot
combination  process and product  development and biological testing facility in
which Scios has produced bulk and clinical supplies of FIBLAST(R).  In 1995, the
Company began  leasing a 52,000  square foot building in Sunnyvale,  California,
and  constructed  research  laboratories.  The Company  relocated  its discovery
research group to the Sunnyvale facility in September 1996. The Company's annual
lease  payments for the  Sunnyvale  facility  are  approximately  $730,000.  The
Company expended  approximately $2.5 million in capital expenditures in 1997 and
anticipates spending approximately $2.5 million in capital expenditures in 1998.

    The Company owns a 57,428 square foot administrative and laboratory building
in  Baltimore,  Maryland (the  "Holabird  Facility").  Approximately  67% of the
Holabird  Facility is currently leased to third parties under short-term  leases
extending through July, 1999 (32,700 square feet) and July, 2000  (approximately
10,000 square feet). The Company is endeavoring to sell the Holabird Facility.

Item 3.  LEGAL PROCEEDINGS

    In  September  1996,  the  United  States  District  Court for the  Northern
District of California dismissed with prejudice a lawsuit that had been filed by
certain  stockholders in May 1995 against the Company and Richard L. Casey, its'
chairman and chief executive officer, on behalf of the individual plaintiffs and
on behalf of other  purchasers  of the  Company's  stock  during the period from
October  6, 1993 to May 2,  1995.  The  action  alleged  violations  of  federal
securities  laws,  claiming  that the  defendants  issued a series  of false and
misleading  statements,  including  filings  with the  Securities  and  Exchange
Commission,  regarding the Company and clinical trials  involving  AURICULIN(R).
The plaintiffs appealed the District Court's ruling in favor of the Company, but
withdrew their appeal with prejudice immediately prior to the oral hearing. As a
result, the action against the Company has been terminated.

    In  November   1995,   the  Company  was  notified  by  the  United   States
Environmental  Protection  Agency  ("EPA")  that  it  may  have a  liability  in
connection  with the  clean-up of a toxic waste site  arising out of the alleged
disposal of  hazardous  substances  by a  subcontractor  of Nova  Pharmaceutical
Corporation,  which was  acquired by the Company in 1992.  The Company  believes
that its exposure for clean costs is approximately $90,000, and it has created a
reserve for such exposure.

     The  Company is also  involved  in  certain  legal  proceedings  related to
patents and patent application  covering its products.  See "Business -- Patents
and Proprietary Rights."

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

    No matters were  submitted to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report.
<PAGE>

                                   MANAGEMENT

Executive Officers
------------------

    The  executive  officers of the Company and their ages at March 16, 1998 are
as follows:
<TABLE>
<CAPTION>

Name                               Age                  Position
----                               ---                  --------
<S>                                <C>                  <C>    

Richard L. Casey                   51                   Chairman of the Board,
                                                        President and Chief 
                                                        Executive Officer

Elliott B. Grossbard, M.D.         50                   Senior Vice President of
                                                        Development

John H. Newman                     47                   Senior Vice President,
                                                        General Counsel and 
                                                        Secretary

Jack Cohen, Ph.D.                  61                   Vice President, Quality 
                                                        & Regulatory

Thomas L. Feldman                  47                   Vice President of 
                                                        Commercial Operations

John A. Lewicki, Ph.D.             46                   Vice President of
                                                        Research

Armin H. Ramel, Ph.D.              71                   Vice President of 
                                                        Product Development
</TABLE>

    Mr. Casey is Chairman of the Board, President and Chief Executive Officer of
Scios Inc. He joined Scios in December  1987 and has served as a Director  since
that time.  From early 1985 to 1987, he was with ALZA  Corporation  as Executive
Vice  President  and  President  of ALZA  Pharmaceuticals.  From 1976 to 1985 he
worked for  Syntex  Corporation,  in various  positions  including  Director  of
Marketing  Research,  Director of Sales,  Vice President and General  Manager of
Syntex Medical  Diagnostics.  Mr. Casey began his career in pharmaceuticals as a
sales  representative  for Eli Lilly and Company.  From 1968 to 1970,  Mr. Casey
served in the U.S.  Peace Corps in  Ethiopia.  Mr. Casey serves on the boards of
Guilford  Pharmaceuticals  Inc., an affiliated  publicly-held  development-stage
neuroscience   company   located  in  Baltimore,   Maryland;   VIVUS,   Inc.,  a
publicly-held medical devices company located in Mountain View, California;  and
Karo Bio AB, an affiliated privately-held Swedish biotechnology company.

    Dr.  Grossbard  joined  Scios  in 1991  as Vice  President  of  Medical  and
Regulatory  Affairs and became Senior Vice President in 1996.  Immediately prior
to joining Scios,  he was Vice President of Medical Affairs for  HemaGen/PFC,  a
privately-held company developing  perfluorocarbon products for oxygen transport
and as blood substitutes. From 1982 to 1990, he was Associate Director and later
Director  of  Clinical  Research  for  Genentech,  in  charge  of  the  clinical
development  of Alteplase  (TPA).  From 1978 to 1980, as an Assistant  Attending
Physician at Memorial  Hospital and  Assistant  Professor of Medicine at Cornell
Medical  School,  he helped to establish the Bone Marrow  Transplant  Service at
Memorial Hospital.  He received his M.D. from the Columbia College of Physicians
and  Surgeons in 1973,  trained in internal  medicine at  Massachusetts  General
Hospital  in Boston and  received  subspecialty  training in  hematology  at the
Columbia-Presbyterian  Medical  Center and the Memorial  Sloan-Kettering  Cancer
Center in New York.

    Mr.  Newman  joined  Scios in 1983 as Vice  President,  General  Counsel and
Secretary, and became Vice President of Commercial Development,  General Counsel
and Secretary in December 1989, Vice President of Legal Affairs, General Counsel
and  Secretary  in March 1992 and Senior  Vice  President,  General  Counsel and
Secretary in February 1998.  Prior to joining Scios,  Mr. Newman was an attorney
in private practice.

    Dr. Cohen joined Scios in 1992 as Vice  President of Quality and became Vice
President of Quality & Compliance in 1994, and the Vice President of Quality & 
Regulatory in  September,  1997.  Prior to joining the Company,  Dr. Cohen was
the Director,  Technical  Resource  Planning for Syntex  Corporation.  From 1981
to 1991, he was Vice  President,  Quality Assurance at Syntex Laboratories, Inc.
and prior to that from 1978 to 1981, the Director, Quality Control.
<PAGE>

    Mr.  Feldman  joined Scios in January 1995 as Vice  President of  Commercial
Operations.  Prior to joining the Company, Mr. Feldman was responsible for sales
and marketing activities in two pharmaceutical companies affiliated with Johnson
& Johnson.  From 1993 through 1994,  Mr.  Feldman was National  Sales Manager at
Ortho  Pharmaceutical  Corporation.  From 1973 to 1993, Mr. Feldman held various
sales and marketing positions at McNeil  Pharmaceutical,  where he most recently
served as National Sales Manager from 1990 to 1993.

    Dr. Lewicki joined Scios in 1983 as a Scientist, and became Senior Scientist
in 1984,  Vice  President,  Research in August 1986,  Vice  President and Deputy
Director, Research in March 1987, and Vice President and Director of Research in
February 1988. Dr. Lewicki  received his Ph.D. in  Physiology/Pharmacology  from
the University of California,  San Diego in 1979. From 1979 to 1981, Dr. Lewicki
conducted  postdoctoral  research at the  University of Virginia,  Department of
Internal Medicine,  and, from 1981 to 1983, he was a research  pharmacologist at
Stanford University, Division of Clinical Pharmacology.

    Dr. Ramel joined the Company in July 1993 as Vice President of Product 
Development.  Prior to joining Scios, Dr. Ramel spent eleven years at Genentech,
most recently as Senior Director of Process Sciences, which  consisted  of three
departments: Cell Culture and Fermentation, Product Recovery, and Pharmaceutical
R&D. Prior to joining  Genentech, he was  Director  of the  Biopolymer  Research
Department  at  Hoffmann-La  Roche Inc.  He held  academic  positions  at the
University of Basel,  Switzerland, SUNY at Buffalo and Boston University Medical
School, and was a postdoctoral fellow at UC  Berkeley's  Biochemistry  and Virus
Laboratory.  In addition, he was an NIH fellow for two years.  Dr. Ramel holds a
Ph.D.  in  Physical  Chemistry  from the  University  of  Basel.  He  serves  on
the board of Sepragen Corporation, a publicly-held manufacturer of bioprocessing
equipment used in the production of biopharmaceuticals.

                                     PART II

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

    The  Company's  Common  Stock and Class D Warrants  are traded on the Nasdaq
National  Market  System  under the symbols  SCIO and SCIOZ,  respectively.  The
tables  below set forth the high and low sales  prices as reported by Nasdaq for
the  Common  Stock and the Class D Warrants  during  the last two fiscal  years.
Prices represent quotations among dealers without adjustment for retail markups,
markdowns or commissions,  and may not represent  actual  transactions.  No cash
dividends  have been paid on Common Stock,  and the Company does not  anticipate
paying cash dividends in the foreseeable  future.  As of December 31, 1997 there
were  approximately  5,607 stockholders of record of the Company's Common Stock.
The Class D Warrants are exercisable  through June 1998 at a price of $26.74 per
share.

<TABLE>
<CAPTION>



                                          Common Stock
                                          ------------

                           FY 1997                            FY 1996
                           -------                            -------
                      High         Low                   High         Low
                      ----         ---                   ----         ---
    <S>               <C>          <C>                   <C>          <C>    
    Q1                8-3/4        5-3/8                 5-11/16      4-1/16
    Q2                7            3-5/8                 8-3/16       4-1/16
    Q3                9-7/8        5-7/8                 7-3/16       5
    Q4                10-5/8       6-7/8                 7-1/8        4-5/8
    Year              10-5/8       3-5/8                 8-3/16       4-1/16
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                          Class D Warrants
                                          ----------------

                           FY 1997                            FY 1996
                           -------                            -------
                      High         Low                   High         Low
                      ----         ---                   ----         ---
    <S>               <C>          <C>                   <C>          <C>    
    Q1                1-3/16       1/4                   1-3/16       1/2
    Q2                3/4          3/8                   1-1/4        13/32
    Q3                1            3/8                   7/8          3/8
    Q4                11/16        1/4                   3/4          3/8
    Year              1-3/16       1/4                   1-1/4        3/8
</TABLE>


Item 6.  SELECTED FINANCIAL DATA
<TABLE>

(Dollars in thousands, except per share amounts)
<CAPTION>

Year Ended December 31,      1997               1996             1995              1994              1993
                             ----               ----             ----              ----              ----
<S>                          <C>                <C>              <C>               <C>               <C>  
Revenues                     $ 47,429           $ 64,223         $ 49,187          $ 53,667          $ 47,568
Loss from operations          (39,737)           (22,053)         (28,175)          (31,719)          (43,237)
Other income                    2,254              4,497            5,049             4,045             6,298
Net loss                      (38,667)           (18,403)         (26,382)          (27,961)          (36,579)
Net loss per common share and
 per common share assuming
 dilution                       (1.07)             (0.51)           (0.74)            (0.79)            (1.05)
Cash and securities            64,700             62,170           87,069           104,439           108,271
Working capital                (4,524)            (5,838)          11,642            38,942            96,334
Total assets                  116,871            113,961          131,550           146,096           151,278
Long-term obligations          31,919                426            1,082             1,739             2,323
Stockholders' equity           60,142             93,628          109,394           126,438           135,299
Employees at year end             350                335              301               283               337

</TABLE>



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

     The following discussion contains  forward-looking  statements about plans,
objectives,  future results and intentions of Scios Inc. (the "Company").  These
forward-looking statements are based on the current expectations of the Company,
and the Company assumes no obligation to update this information. Realization of
these plans and results  involves  risks and  uncertainties,  and the  Company's
actual results could differ  materially from those discussed here.  Factors that
could cause or contribute to such differences  include,  but are not limited to,
those  discussed  below,  as well as in other  sections of this Annual Report on
Form 10-K for the year ended December 31, 1997.

Operating Results (1997, 1996 and 1995)
-----------------

     Total revenues for Scios were $47.4 million in 1997,  $64.2 million in 1996
and $49.2 million in 1995. The revenue  decline from 1996 to 1997 was the result
of lower product sales,  co-promotion  commissions  and research and development
contract  revenues.  The  revenue  increase  from 1995 to 1996 was due to higher
research and development contract revenues and co-promotion commissions.
<PAGE>

     Revenue from product sales of certain psychiatric  products ("SB Products")
under license from  SmithKline  Beecham  Corporation  ("SB") was $35.2  million,
$38.2 million and $41.4 million in 1997,  1996 and 1995,  respectively.  Product
sales  declined  8% each  year due to  competition  from  generic  drugs and new
competing products.

     Co-promotion  commissions were $5.8 million, $6.5 million, and $2.3 million
in  1997,  1996  and  1995,  respectively.  The  Company  receives  co-promotion
commissions under agreements with Ortho-McNeil Pharmaceutical  ("Ortho-McNeil"),
an  affiliate  of  Johnson & Johnson,  for the  co-promotion  of  Ortho-McNeil's
psychiatric  product HALDOL(R)  Decanoate,  and with  Wyeth-Ayerst  Laboratories
("Wyeth-Ayerst"),  a division of American  Home  Products  Corporation,  for the
co-promotion of Wyeth-Ayerst's psychiatric product EFFEXOR(R) (venlafaxine HCl).
Co-promotion revenue under both agreements is based on achieving aggregate sales
levels  over  contract  years,  which  do  not  coincide  with  calendar  years.
Consequently,  annual revenue  recognition  is based,  in part, on the Company's
forecast of sales for the respective  contract years.  Co-promotion  commissions
decreased  from 1996 to 1997 as a result of lower sales of HALDOL(R)  Decanoate.
Co-promotion commissions increased from 1995 to 1996 as a result of higher sales
of HALDOL(R)  Decanoate and from revenue recognized for seven months of contract
year sales of EFFEXOR(R) (venlafaxine HCl) under the agreement with Wyeth-Ayerst
effective June of 1996.

     Revenues from research and development contracts were $6.4 million in 1997,
$19.5  million in 1996 and $5.5 million in 1995.  The decrease from 1996 to 1997
and the  increase  from 1995 to 1996 were  principally  due to  receipt of $12.0
million in 1996 from Wyeth-Ayerst  upon entering into a collaboration  agreement
for the development and  commercialization of FIBLAST(R)  trafermin  ("FIBLAST")
for the treatment of neurological and cardiovascular  disorders and $2.0 million
received  under  other  agreements.  In  1996,  the  payment  from  Wyeth-Ayerst
accounted for 62% of total research and development  contract revenue.  Revenues
under  collaborations to study Alzheimer's disease comprised  approximately 44%,
8% and 32% of contract  revenue in 1997, 1996 and 1995,  respectively.  Revenues
under the collaboration with Kaken Pharmaceutical Co., Ltd. ("Kaken") to develop
FIBLAST(R) in Japan for the treatment of dermal  ulcers,  were 3%, 9% and 30% of
contract revenue in 1997, 1996 and 1995, respectively.

     Cost of goods sold for the SB Products was $20.2 million, $22.3 million and
$24.7 million in 1997,  1996 and 1995,  respectively.  The declines from year to
year were principally the result of lower unit sales.  Gross margins improved to
43% in 1997 from 42% in 1996 and 40% in 1995 due to a sales  mix  shift  towards
higher  margin  products and annual  price  increases.  Future  changes in gross
margins  will be  principally  dependent  upon the  effects of price  increases,
competition in the marketplace and changes in the product mix.

     Research and development expenses were $41.9 million in 1997, $39.4 million
in 1996 and $29.3 million in 1995. The increases year to year were the result of
higher staffing levels, greater expenses for clinical trials and the purchase of
drug supply to support further development of the Company's lead products.

     Marketing,  general and administrative expenses were $20.7 million in 1997,
$19.8  million in 1996,  and $18.2 million in 1995.  The spending  increase from
1996 to 1997  was  principally  due to  higher  staffing  levels.  The  spending
increase from 1995 to 1996 was principally due to higher depreciation  resulting
from facility improvements.

     The profit distribution to third parties of $4.4 million,  $4.8 million and
$5.1 million in 1997, 1996 and 1995, respectively,  represents SB's share of the
net  profits  from sales of the SB  Products.  The  decreases  year to year were
principally due to declining product sales.

     Other  income  was $2.3  million  in 1997,  $4.5  million  in 1996 and $5.0
million  in 1995.  The  decrease  from 1996 to 1997 was due to lower  investment
income  from the  Company's  invested  portfolio  and the  addition  of interest
expense  on the $30  million  loan from  Genentech  that was drawn down in March
1997. The decrease from 1995 to 1996 was due to lower investment income from the
Company's invested portfolio and higher royalty expenses offset in part by gains
on the sale of 200,000  shares of  Guilford  Pharmaceuticals  Inc.  ("Guilford")
stock and other marketable securities in the Company's investment portfolio.

     The $1.3  million net loss in equity of  affiliate in 1997 and $3.3 million
loss in 1995, was the result of Guilford losses in those  respective  years. The
$0.3 million  gain in equity in  affiliate in 1996 was the result of  profitable
operations of Guilford in 1996. The Company's  percent ownership in Guilford has
declined  from  62% in May  1994  to 7% at  December  31,  1997 as a  result  of
Guilford's  public stock  offerings and sales of Guilford stock by Scios.  Since
Guilford's  initial public stock offering in June 1994, the Company has used the
equity  method of  accounting  for its  investment.  Prior to the  public  stock
offering,  the financial results of Guilford were consolidated with those of the
Company.  The minority  interest of $0.1  million in 1997 and $(1.1)  million in
1996 is the net income or expense  associated with the minority  partners of the
Biotechnology Research Partnership.
<PAGE>

Outlook and Risks
-----------------

     The Company is striving to achieve profitability in the next several years.
The ability of the Company to achieve  profitability  depends  principally upon:
(i) the Company's success in obtaining FDA approval for and  commercializing its
lead product NATRECOR(R)  (nesiritide  citrate);  (ii) the Company's progress in
developing   additional  products  such  as  FIBLAST(R),   and  its  ability  to
demonstrate safety and efficacy of these products and subsequently commercialize
them; (iii) the Company's success in generating operating profits from marketing
and selling in-licensed  products such as the SB Products,  HALDOL(R) Decanoate,
EFFEXOR(R)  (venlafaxine HCl) and any third-party  products,  which success will
depend  on  the  Company's   ability  to  establish   and  maintain   profitable
arrangements  under which to represent  the products of third parties and on the
respective product's success in the marketplace; and (iv) the development of new
third-party  funding sources and other revenues to support  continuing  research
and development  programs and the results  realized by third parties on whom the
Company  may rely to sell  its  products,  particularly  outside  of the  United
States.  Profitability  will  also  be  affected  by the  Company's  ability  to
undertake  complex  manufacturing  processes  in  a  cost-effective  manner,  to
scale-up and then manufacture products the Company expects to market directly or
with a partner,  and any products  manufactured for third parties.  With limited
manufacturing resources of its own, the Company has entered into contracts with,
and is dependent  upon,  third-party  suppliers for the  manufacture of its lead
products.  Although the Company  does not  currently  foresee a supply  problem,
future  product  supply and the  Company's  profitability  could be  affected by
events at these suppliers over which the Company has limited control.

         Further  development of the Company's products will require substantial
additional  investment to cover,  among other things, the costs of marketing and
sales  expenses   associated  with  product   introductions,   the  securing  of
commercial-scale  manufacturing capability and the completion of clinical trials
for new and expanded indications.  While market introduction of new products may
require considerable  expenditures by the Company,  revenues generated from such
products,  assuming  they are  successfully  developed,  may not be realized for
several  years.  Principal  factors  that could  affect the level of new product
revenues  will  include  the rate of market  penetration,  the  availability  of
alternative  therapies,  the price charged by the Company per course of therapy,
the  breadth  of  the  approved   indication   allowed  by  the  Food  and  Drug
Administration  and  what,  if  any,  income  can  be  obtained  from  potential
third-party  licensees.  In the case of NATRECOR(R),  the Company is reviewing a
number of  alternative  arrangements  for the sale and  marketing of the product
once FDA  approval  has been  obtained.  In the  case of  FIBLAST(R)  for use in
neurological and  cardiovascular  disorders,  development and  commercialization
expenses and any subsequent revenues will be shared with Wyeth-Ayerst at varying
percentages.

     Sales of the SB  Products,  in total,  are  likely to  continue  to decline
during the next few years because of continuing or new competition  from generic
products or new market  entrants.  The Company hopes to offset any such decrease
with payments received for the co-promotion of other  third-party  products such
as HALDOL(R) Decanoate and EFFEXOR(R) (venlafaxine HCl) that are currently being
co-promoted. Factors influencing the availability of such additional products on
terms favorable to the Company include the ability of the Company to demonstrate
success under its current  agreements and the  willingness of other companies to
enter into such agreements. The HALDOL(R) Decanoate agreement is expected to end
in 1998 and the Company is endeavoring to secure a replacement product.

     A portion of the  Company's  revenues  will  continue  to be  derived  from
collaborative research agreements.  Future collaborative funding will depend, in
part,  upon  priorities  set by the sponsors in relation to the sponsors'  other
product   opportunities  and  their  assessment  of  the  continued  benefit  of
sponsoring a particular program at the Company. Other licenses and agreements to
manufacture  and supply bulk  materials are also subject to  termination  by the
licensee or contract sponsor under certain circumstances.
<PAGE>

     The Company is  reviewing  its  existing  software  programs  for year 2000
compliance  and  believes  its  internal  application  systems are  currently in
compliance,  or will be, upon completion of some software upgrades scheduled for
implementation  in 1999.  The Company does not expect the cost of these upgrades
to have a material impact on the Company's financial results. The Company is not
able to ensure that all third  parties with whom it works will achieve year 2000
compliance for systems related to their interactions with the Company.

     For the reasons  stated  above,  the  operating  results of the Company are
expected to fluctuate from period to period. Inflation is not expected to have a
significant  effect upon the business of the Company.  In addition,  because the
Company  participates in a highly dynamic  industry,  the Company's common stock
price is subject to significant  volatility as a result of  developments at both
the Company and in the biopharmaceutical industry in general.

Liquidity and Capital Resources
-------------------------------

     Combined  cash,  cash   equivalents   and  securities   (both  current  and
non-current)  totaled  $64.7  million at December 31, 1997,  an increase of $2.5
million from December 31, 1996. The increase was mainly attributable to the draw
down of a $30 million loan from Genentech Inc. which was offset by $21.6 million
used to fund  operations,  $2.5  million  of  spending  on  property,  plant and
equipment  and $1.8  million used for the  purchase of treasury  stock.  Working
capital  increased  from $(5.8)  million at December 31, 1996 to $4.5 million at
December  31,  1997.  The change  resulted  principally  from an increase in the
amount of marketable securities classified as current assets.

     In November  1995,  the Company  announced  that its board of directors had
authorized the expenditure of up to $6.0 million for the repurchase of shares of
the Company's  common stock.  As of December 31, 1997, the Company had purchased
1,029,500 shares at an aggregate price of $4.8 million under this program.

     To date,  the  Company's  operations  and  capital  requirements  have been
financed  primarily  from the  proceeds  of public and  private  sales of common
stock,  research and  development  partnerships,  collaborative  agreements with
pharmaceutical  firms,  product sales and investment  income.  The Company's net
operating losses and credit  carryforwards  will provide an additional source of
liquidity  only to the extent that  profitable  operations are achieved prior to
the expiration of  carryforward  periods.  The  utilization of losses  generated
through the date of the 1992 merger with Nova Pharmaceutical Corporation will be
subject to annual limitations.

Outlook and Risks
-----------------

     The  Company's  cash,  cash   equivalents  and  marketable   securities  of
approximately  $64.7  million at December 31, 1997,  together with revenues from
product sales, royalties,  collaborative agreements and interest income, will be
used to fund new and  continuing  research and  development  programs,  expanded
clinical  trials  for its  products  under  development  and for  other  general
purposes.  In  addition  to its cash and  marketable  securities  balances,  the
Company may also fund operations by the sale of all, or a portion of, its equity
investments  in Guilford and KaroBio AB, a Swedish  company in which Scios holds
an 18% ownership  position.  The Company also has a $12.0 million line of credit
from Wyeth-Ayerst available to expand its manufacturing facility for FIBLAST(R).
The Company  believes its cash  resources and lines of credit will be sufficient
to meet its capital  requirements  for the next several years. Key factors which
will  affect  future  cash  use and the  timing  of the  Company's  need to seek
additional  financing  include the Company's  decision  concerning the degree to
which it will incur  expenses  to launch its  products  such as  NATRECOR in the
United States market following the necessary regulatory  approvals,  the results
of the  Company's  partnering  efforts and the timing and amounts  realized from
licensing and partnering  activities,  the rate of spending  required to develop
the Company's  products and respond to changing business  conditions and the net
contribution  produced by the Commercial  Operations  Division from co-promoting
and marketing products for third parties.

     Over the long term,  the Company may need to arrange  additional  financing
for the future operation of its business, including the commercialization of its
products   currently  under   development,   and  will  consider   collaborative
arrangements and additional public or private financings,  including  additional
equity  financings.  Factors  influencing the availability of additional funding
include the Company's progress in product  development,  investor  perception of
the Company's prospects and the general conditions of the financial markets.
<PAGE>

Recent Pronouncements
---------------------

    In June 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes  effective  for the Company  for the fiscal  year,  beginning
after December 15, 1997, with  reclassification of earlier financial  statements
for comparative purposes.  Comprehensive income generally represents all changes
in stockholders' equity except those resulting from investments or contributions
by stockholders.  The Company is evaluating  alternative  formats for presenting
this  information,  but does not expect this  pronouncement to materially impact
the Company's results of operations.

    In June 1997, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related  Information." This statement establishes standards
for  disclosure  about  operating  segments in annual  financial  statements and
selected information in interim financial reports. It also establishes standards
for related  disclosures about products and services,  geographic area and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14,  "Financial  Reporting for Segments of a Business  Enterprise."  The new
standard  becomes  effective for the fiscal year  beginning  after  December 15,
1997, and requires that  comparative  information from earlier years be restated
to conform to the  requirement of this  standard.  The Company is evaluating the
requirements  of SFAS 131 and the  effects,  if any,  on the  Company's  current
reporting and disclosures.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See Index to Financial  Statements  and  Schedules  appearing on page F-1 of
this Form 10-K.

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

    None.


                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Identification  of Directors.  The  information  required by Item 10 of Form
10-K with respect to identification of directors is incorporated by reference to
the information  contained in the section  captioned  "Election of Directors" of
the  Company's  definitive  Proxy  Statement  for the  1998  Annual  Meeting  of
Stockholders.

    Identification of Executive Officers. See pages 17 and 18 of this Form 10-K.

Item 11. EXECUTIVE COMPENSATION

    The  information  required  by  Item  11 of Form  10-K  is  incorporated  by
reference to the  information  contained in the  sections  captioned  "Executive
Compensation"   and  "Stock  Option  Grants  and  Exercises"  of  the  Company's
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The  information  required  by Item 12 of Form  10-K is  incorporated  by
reference  to the  information  contained  in the  section  captioned  "Security
Ownership of Management and Principal  Stockholders" of the Company's definitive
Proxy Statement for the 1998 Annual Meeting of Stockholders.
<PAGE>

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       The  information  required  by Item 13 of Form  10-K is  incorporated  by
reference  to the  information  contained  in  the  section  captioned  "Certain
Relationships and Transactions" of the Company's  definitive Proxy Statement for
the 1998 Annual Meeting of the Stockholders.


                                     PART IV

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

       (a) (1)  Financial  Statements.  See Index to  Financial  Statements  and
Schedules  at page F-1 of this Form 10-K.

           (2)  Financial Statement Schedules. See Index to Financial Statements
and Schedules at page F-1 of this Form 10-K.

           (3)   Exhibits.  See Exhibit Index at page 24 of this Form 10-K.

       (b) Reports on Form 8-K.  There were no reports on Form 8-K filed in the 
last quarter of 1997.

<TABLE>
<CAPTION>


                                  EXHIBIT INDEX
       Exhibit
       Number                                                                                       Page
       ------                                                                                       ----
       <S>     <C>                                                                                  <C> 
       3.1     Certificate of Incorporation.........................................................Q

       3.2    Bylaws................................................................................J

       10.1   Biotechnology Research Partners, Ltd. Agreement of Limited 
              Partnership dated October 29, 1982; Development Contract, 
              Technology License Agreement and Joint Venture Agreement between 
              Biotechnology Research Partners, Ltd. and the Registrant dated 
              December 29, 1982; Promissory Note dated December 29, 1982;
              and Memorandum of Understanding between Battery Park Credit
              Company and Biotechnology Research Partners, Ltd. dated 
              December 28, 1982.....................................................................A

       10.2*  1983 Incentive Stock Option Plan, as amended, and form of Stock 
              Option Agreement, Promissory Note and Pledge Agreement................................E

       10.3   Common Stock Purchase Agreement dated April 15, 1985 between 
              the Registrant and American Home Products Corporation.................................B

       10.4   Agreement of Purchase and Sale (Real Estate) and Joint Escrow 
              Instructions by and between Charleston Properties and Bio-Shore 
              Holdings, Ltd. dated December 30, 1986................................................C

       10.5*  1986 Supplemental Stock Option Plan, as amended, and form of Stock
              Option Agreement, Promissory Note and Pledge Agreement................................E

       10.6   Rights Exercise Agreement between the Registrant and American 
              Home Products Corporation dated February 28, 1986 and Letter of 
              March 26 and May 16, 1986.............................................................B
<PAGE>

       10.8*  Employment Letter dated November 11, 1987 between the Registrant 
              and Richard L. Casey..................................................................D

       10.9   Rights Agreement dated as of June 18, 1990 between the Registrant
              and The First National Bank of Boston.................................................F

       10.11* 1992 Equity Incentive Plan............................................................H

       10.18  Form of Purchase Option Agreement between each of the limited 
              partners of Nova Technology Limited Partnership and Nova..............................I

       10.19* Nonemployee Director Stock Option Plan................................................G

       10.20  Warrant Agreement dated December 1, 1987 between the Registrant 
              and IBJ Schroder Bank & Trust Company.................................................K

       10.27  Purchase Agreement dated as of July 29, 1988 between Nova and 
              SKB Properties, Ltd...................................................................M

       10.29  CNS Psychiatric Products Agreement dated June 30, 1990 between 
              SmithKline Beecham Corporation and Nova...............................................N

       10.30  Master Security Agreement, Promissory Note and Negative Covenant 
              Agreement, each dated April 28, 1993, between the Registrant and 
              General Electric Capital Corporation..................................................O

       10.31  Master Lease Agreement dated July 16, 1993 between the Registrant
              and General Electric Capital Corporation..............................................O

       10.32  Collaboration Agreement dated December 30, 1994 between the 
              Registrant and Genentech, Inc.........................................................Q

       10.33  Preferred Stock Purchase Agreement dated December 30, 1994 between
              the Registrant and Genentech, Inc.....................................................Q

       10.34  Note Agreement dated December 30, 1994 between the Registrant 
              and Genentech, Inc....................................................................Q

       10.35  Assignment of Lease dated March 22, 1995 for premises located 
              at 820 West Maude Avenue, Sunnyvale, California.......................................R

       10.36  Special Warranty Deed of Improvements dated February 24, 1995 
              from Rouse-Teachers Properties, Inc. ("RTP") to the Registrant 
              and Assignment of Ground Lease dated February 22, 1995 from 
              RTP to the Registrant.................................................................R

       10.37  Lease Agreement dated January 20, 1995 between the Registrant 
              and PDL-RTKL Associates, a Maryland General Partnership...............................R

       21.1   Subsidiaries of Registrant............................................................S

       23.1       Consent of Coopers & Lybrand L.L.P.

       24.1       Powers of Attorney.  Reference is made to page 27.
-------------------
<PAGE>
<FN>

*      Management contract or compensatory plan or arrangement.

A      Filed  as an  exhibit  to  Form  S-1  Registration  Statement  (File  No.
       2-86086), as amended, and incorporated herein by reference.

B      Filed  as an  exhibit  to  Form  S-1  Registration  Statement  (File  No.
       33-3186), as amended, and incorporated herein by reference.

C      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1986 
       and incorporated herein by reference.

D      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1987 
       and incorporated herein by reference.

E      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988 
       and incorporated herein by reference.

F      Filed  as an  exhibit  to Form 8-K  filed  on June 19,  1990 and Form 8-A
       Registration  Statement filed on June 20, 1990 and incorporated herein by
       reference.

G      Filed  as an  exhibit  to  Form  S-8  Registration  Statement  (File  No.
       33-39878) filed on April 8, 1991 and incorporated herein by reference.

H      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991 
       and incorporated herein by reference.

I      Filed  as an  exhibit  to  Form  S-1  Registration  Statement  (File  No.
       33-14937)  filed on behalf of Nova  Technology  Limited  Partnership  and
       incorporated herein by reference.

J      Filed  as an  exhibit  to  Form  S-4  Registration  Statement  (File  No.
       33-49846) filed on July 22, 1992 and incorporated herein by reference.

K      Filed as an exhibit to Form S-3 Registration  Statement of Nova (File No.
       33-14938) and  incorporated  herein by reference.

M      Filed as an exhibit to Nova's Report on Form 8-K dated July 29, 1988 and 
       incorporated herein by reference.

N      Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal  year
       1990 and  incorporated  herein by reference.

O      Filed as  an exhibit  to  Quarterly  Report on Form 10-Q for the quarter
       ended June 30,  1993 and  incorporated herein by reference.

Q      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994 
       and incorporated herein by reference.

R      Filed  as  an  exhibit  to  Quarterly Report on Form 10-Q for the quarter 
       ended March 31, 1995 and  incorporated herein by reference.

S      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1996 
       and incorporated herein by reference.
</FN>
</TABLE>

<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.

                                                  SCIOS INC.

  Date:  March 27, 1998                           By:___________________________

                                                  Richard L. Casey
                                                  Chairman of the Board, 
                                                  President and Chief Executive 
                                                  Officer

                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes and appoints  Richard L. Casey his  attorney-in-fact,
with the power of substitution,  for him in any and all capacities,  to sign any
amendments  to this  Report on Form 10-K,  and to file the same,  with  exhibits
thereto and other  documents in connection  therewith,  with the  Securities and
Exchange  Commission,   hereby  ratifying  and  confirming  all  that  the  said
attorney-in-fact,  or his substitute or substitutes,  may do or cause to be done
by virtue hereof.

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

         Signature                                             Title                                        Date
         ---------                                             -----                                        ----
<S>                                             <C>                                                     <C>   
    /s/ Richard L. Casey                        Chairman of the Board, President and Chief              March 27, 1998
  ------------------------------                Executive Officer (Principal Executive Officer)
  Richard L. Casey                              

    /s/ David Southern                          Controller                                              March 27, 1998
  -------------------------------               (Principal Accounting Officer)
  David Southern                                

    /s/ Samuel H. Armacost                      Director                                                March 27, 1998
  ---------------------------
  Samuel H. Armacost

   /s/ Myron Du Bain                            Director                                                March 27, 1998
  ------------------------------
  Myron Du Bain

    /s/ Donald B. Rice                          Director                                                March 27, 1998
  --------------------------------
  Donald B. Rice

    /s/ Charles A. Sanders                      Director                                                March 27, 1998
  ------------------------------
  Charles A. Sanders

    /s/ Robert W. Schrier                       Director                                                March 27, 1998
  -------------------------------
  Robert W. Schrier

    /s/ Burton E. Sobel                         Director                                                March 27, 1998
  ---------------------------------
  Burton E. Sobel

    /s/ Solomon H. Snyder                       Director                                                March 27, 1998
  ----------------------------
  Solomon H. Snyder

    /s/ Eugene L. Step                          Director                                                March 27, 1998
  --------------------------------
  Eugene L. Step
</TABLE>

<PAGE>


                       FINANCIAL STATEMENTS AND SCHEDULES


                                                                            Page
                                                                            ----


Report of Independent Accountants............................................F-2

Consolidated Balance Sheets at December 31, 1997 and
 December 31, 1996 ..........................................................F-3

Consolidated Statements of Operations for the years ended
 December 31, 1997, 1996 and 1995............................................F-4

Consolidated Statements of Cash Flows for the years ended
 December 31, 1997, 1996 and 1995............................................F-5

Consolidated Statements of Stockholders' Equity for the
 years ended December 31, 1997, 1996 and 1995................................F-6

Notes to Consolidated Financial Statements ..................................F-7

Financial Statement Schedules
(Omitted because they are not required,  are not applicable,  or the information
is included in the consolidated financial statements or notes thereto.)

                                      F-1


<PAGE>







                        REPORT OF INDEPENDENT ACCOUNTANTS



        To the Board of Directors and Stockholders of
        Scios Inc.:

        We have audited the  accompanying  consolidated  balance sheets of Scios
        Inc. and  subsidiaries as of December 31, 1997 and 1996, and the related
        consolidated  statements of  operations,  stockholders'  equity and cash
        flows for each of the three years in the period ended December 31, 1997.
        These  financial  statements  are the  responsibility  of the  Company's
        management.  Our  responsibility  is to  express  an  opinion  on  these
        financial statements based on our audits.

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

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




        Coopers & Lybrand L.L.P.
        San Jose, California
        January 30, 1998

                                      F-2



<PAGE>


                                   SCIOS INC.

                                AND SUBSIDIARIES

                           Consolidated Balance Sheets
                        (In thousands, except share data)
<TABLE>
<CAPTION>

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

Current assets:
     Cash and cash equivalents                                                $10,197               $1,587
     Marketable securities                                                     13,322                6,888
     Accounts receivable                                                        5,215                4,808
     Prepaid expenses                                                             600                  786
                                                                          ------------          -----------
       Total current assets                                                    29,334               14,069

Marketable securities, non-current                                             41,181               53,695
Investment in affiliate                                                        10,537                6,939
Property and equipment, net                                                    33,583               36,839
Other assets                                                                    2,236                2,419
                                                                          ------------          -----------

TOTAL ASSETS                                                                 $116,871             $113,961
                                                                          ------------          -----------

     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable to banks                                                        --               $3,000
     Accounts payable                                                           1,685                2,507
     Other accrued liabilities                                                 11,134               10,011
     Deferred contract revenue                                                 11,652                3,666
     Current portion of long-term debt and capital leases                         339                  723
                                                                          ------------          -----------
       Total current liabilities                                               24,810               19,907

Long-term debt and capital leases                                              31,919                  349
Minority interests                                                                 --                   77
                                                                          ------------          -----------

TOTAL LIABILITIES                                                              56,729               20,333
                                                                          ------------          -----------
Commitments and contingencies (Notes 9, 10 and 11)

Stockholders' equity:
     Preferred stock; $.001 par value; 20,000,000 shares authorized;
        issued and outstanding: 0 and 12,632, respectively 
        (liquidation                                                               --                   --
        preference of $0 and $12,000, respectively)
     Common stock; $.001 par value;  150,000,000  shares authorized;
        issued and outstanding: 38,032,120 and 36,506,297, respectively            38                   37
     Additional paid-in capital                                               411,045              404,456
     Treasury stock                                                            (4,758)              (2,991)
     Notes receivable from stockholders                                           (13)                 (13)
     Unrealized gains (losses) on securities                                      288                  (70)
     Accumulated deficit                                                     (346,458)            (307,791)
                                                                          ------------          -----------
       Total stockholders' equity                                              60,142               93,628
                                                                          ------------          -----------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $116,871             $113,961
                                                                          ------------          -----------
</TABLE>

     The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-3
<PAGE>


                                   SCIOS INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations
                        (In thousands, except share data)
<TABLE>
<CAPTION>


                                                                            Year Ended December 31,
                                                              1997                 1996                1995
                                                              ----                 ----                ----
<S>                                                           <C>                  <C>                 <C>   
Revenues:
    Product sales                                                $35,193              $38,189             $41,396
    Co-promotion commissions                                       5,822                6,503               2,331
    Research & development contracts                               6,414               19,531               5,460
                                                                   ------              ------               -----
                                                                  47,429               64,223              49,187
                                                                  ------               ------              ------ 

Costs and expenses:
    Cost of goods sold                                            20,179               22,313              24,742
    Research and development                                      41,907               39,424              29,341
    Marketing, general and administration                         20,720               19,779              18,226
    Profit distribution to third parties                           4,360                4,760               5,053
                                                                  ------               ------              ------
                                                                  87,166               86,276              77,362
                                                                  ------               ------              ------

Loss from operations                                             (39,737)             (22,053)            (28,175)

Other income:
    Investment income                                              3,966                6,361               5,481
    Interest expense                                              (2,229)                (419)               (198)
    Other income (expense)                                           517               (1,445)               (234)
                                                                   -----               -------              ------
                                                                   2,254                4,497               5,049

Equity in net income (loss) of affiliate                          (1,261)                 274              (3,256)
Minority interests                                                    77               (1,121)                 --
                                                                ---------            ---------            --------
    Net loss                                                    ($38,667)            ($18,403)           ($26,382)
                                                                ---------            ---------            --------

    Net loss per common share and per common                      ($1.07)              ($0.51)             ($0.74)
    share - assuming dilution                                     -------              -------             -------

    Shares used in computing net loss per
    common
     share and per common shares - assuming                   36,105,797           35,885,922          35,809,876
    dilution                                                  ----------           ----------          ----------

</TABLE>

    The accompanying notes are an integral part of these consolidated  financial
statements.

                                      F-4
<PAGE>

                                   SCIOS INC.
                                AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>

Year Ended December 31,                                      1997                 1996                  1995
                                                          ------------          -----------          ------------
<S>                                                          <C>                  <C>                   <C>   
Cash flows from operating activities:
   Net loss                                                  $(38,667)            $(18,403)             $(26,382)
   Adjustments to reconcile net loss to net
   cash used by operating activities:
      Depreciation and amortization                             5,740                5,330                 3,882
      Accrued long-term interest payable                        1,919                   --                    --
      (Gain) loss on sale of assets                                --               (2,620)                  241
      Equity in net (income) loss of affiliates                 1,261                 (274)                3,256
      Minority interest                                           (77)               1,121                    --
      Change in assets and liabilities:
        Accounts receivable                                      (407)              (1,794)                  585
        Accounts payable                                         (822)              (2,315)                  477
        Other accrued liabilities                               1,123                2,148                (1,821)
        Other                                                     370                 (206)                  (60)
        Deferred contract revenue                               7,986               (2,109)                3,331
                                                          ------------          -----------          ------------
             Net cash used by operating activities            (21,574)             (19,122)              (16,491)
                                                          ------------          -----------          ------------

Cash flows from investing activities:
   Purchase of affiliates warrants                                 --                   --                  (167)
   Purchase of property and equipment                          (2,490)              (6,682)               (5,698)
   Proceeds from sale of investment in affiliate                   90                3,600                    --
   Proceeds from sale of assets                                     6                   44                   163
   Sales/maturities of marketable securities                  264,745              219,027               220,754
   Purchases of marketable securities                        (258,307)            (196,036)             (227,324)
                                                          ------------          -----------          ------------
             Net cash provided by (used in)                     4,044               19,953               (12,272)
             investing activities                         ------------          -----------          ------------

Cash flows from financing activities:
   Issuance of common stock and collection of
       notes receivable from stockholders, net                  1,641                  601                   519
   Purchase of treasury stock                                  (1,767)              (2,024)                 (967)
   Payments of notes payable and capital leases                (3,734)                (668)                 (616)
   Proceeds from notes payable and capital leases              30,000                   --                 3,000
                                                          ------------          -----------          ------------
             Net cash provided by (used in)                    26,140               (2,091)                1,936
             financing activities                         ------------          -----------          ------------

Net increase (decrease) in cash and cash equivalents            8,610               (1,260)              (26,827)
Cash and cash equivalents at beginning of year                  1,587                2,847                29,674
                                                          ------------          -----------           ------------
Cash and cash equivalents at end of year                     $ 10,197              $ 1,587               $ 2,847
                                                          ------------          -----------           ------------

Supplemental cash flow data:
   Cash paid during the period for interest                      $309                 $419                  $203
Supplemental disclosure of non-cash investing
   and financing:
   Change in net unrealized gains (losses)                       $358                $(648)               $2,887
       on securities
   Investment in affiliate                                      4,949                4,708                 6,026

   Incentive plan awards                                          $--                  $--                  $873
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-5
<PAGE>

                                   SCIOS INC.
                                AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
                        (In thousands, except share data)
<TABLE>
<CAPTION>

                                                                                                                       
                                                                                        Notes        Unrealized   
                                 Common Stock           Additional  Preferred           Receivable   Gains        
                                 ---------------------  Paid-In     Stock      Treasury from         (Losses) on Accumulated       
                                 Shares      Par Value  Capital     Par Value  Stock    Stockholders Securities  Deficit   Total
    <S>                          <C>         <C>        <C>         <C>        <C>      <C>          <C>         <C>       <C> 
     -------------------------------------------------------------------------------------------------------------------------------
    Balances at                  35,283,200  $35        $391,745    $ --       $  --    ($27)        $ (2,309)   $(263,006)$126,438
      December 31, 1994
                                                                                           
    Conversion of preferred         500,000    1              (1)                                                                --
    Purchase of treasury stock                                                 ( 967)                                          (967)
    Options exercised               123,171                  512                                                                512
    Notes receivable from                                                                                                        
    stockholders                                                                           7                                      7
    Incentive plan awards           102,684                  873                                                                873
    Changes in unrealized gains
      on available-for-sale                                                                                              
      securities                                                                                        2,887                 2,887
    Investment in Guilford                                 6,026                                                              6,026
    Net loss                                                                                                       (26,382) (26,382)

    -------------------------------------------------------------------------------------------------------------------------------
    Balances at                  36,009,055   36         399,155      --       (   967)  (20)             578     (289,388) 109,394
      December 31, 1995
                                                                           
    Conversion of preferred         342,100    1              (1)                                                                --
    Purchase of treasury stock                                                 ( 2,024)                                      (2,024)
    Options exercised               155,142                  594                                                                594
    Notes receivable from                                                                                                        
    stockholders                                                                           7                                      7
    Changes in unrealized gains
      on available-for-sale                                                                                               
      securities                                                                                         (648)                 (648)
    Investment in Guilford                                 4,708                                                              4,708
    Net loss                                                                                                       (18,403) (18,403)
                                                                                                                    
    -------------------------------------------------------------------------------------------------------------------------------
    Balances at                  36,506,297   37         404,456      --       ( 2,991)  (13)             (70)    (307,791)  93,628
      December 31, 1996                                                               

    Conversion of preferred       1,263,200    1              (1)                                                                --
    Purchase of treasury stock                                                 ( 1,767)                                      (1,767)
    Options exercised               262,621                1,641                                                              1,641
    Stock issued for services             2                                                                                      --
    Changes in unrealized gains
      on available-for-sale                                                                            
      securities                                                                                          358                   358
    Investment in Guilford                                 4,949                                                              4,949
    Net loss                                                                                                       (38,667) (38,667)
                                                                                                                    
    -------------------------------------------------------------------------------------------------------------------------------
    Balances at                  38,032,120  $38        $411,045    $ --       ($4,758) ($13)            $288    ($346,458) $60,142
      December 31, 1997
    -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

    The accompanying notes are an integral part of these consolidated  financial
statements.

                                      F-6

<PAGE>



                           SCIOS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 1.       Formation and Business of the Company
          -------------------------------------

          Scios Inc. (the "Company") is a  biopharmaceutical  company engaged in
          the discovery, development, manufacture and commercialization of novel
          human therapeutics. The Company's research and development efforts are
          primarily  focused on cardiorenal  disorders and Alzheimer's  disease.
          The Company has research and development  collaborations with a number
          of other  biopharmaceutical  companies  under which it may share costs
          and revenues.  Scios' commercial  operations division also markets six
          psychiatric  products in the United  States in  co-operation  with the
          Company's partners. In the course of its development  activities,  the
          Company has  sustained  operating  losses and  expects  such losses to
          continue through at least 1998.

 2.       Summary of Significant Accounting Policies
          ------------------------------------------

          Principles of Consolidation

          The consolidated  financial  statements  include the accounts of Scios
          and  its   wholly-owned   and   majority-owned   subsidiaries.   Other
          affiliates,  more than 20% but less than 50% owned,  are accounted for
          on the  equity  basis.  Intercompany  transactions  and  balances  are
          eliminated on consolidation. The Company accounts for its 7% ownership
          in Guilford  Pharmaceuticals Inc. ("Guilford") under the equity method
          because it has representation on Guilford's Board of Directors.

          Use of Estimates

          The  preparation of financial  statements in conformity with generally
          accepted  accounting  principals requires management to make estimates
          and  assumptions  that  affect  the  reported  amounts  of assets  and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial  statements and the reported amounts of revenues
          and expenses during the reporting period.  Actual results could differ
          from those estimates.

          Cash Equivalents

          The Company considers all highly liquid investments with maturities of
          less than ninety days, at the time acquired, to be cash equivalents.

          Marketable Securities

          All marketable securities at December 31, 1997 and 1996 were deemed by
          management to be available-for-sale  and are stated at fair value with
          net  unrealized  gains or losses  reported  in  stockholders'  equity.
          Realized gains and losses on sales of all such securities are reported
          in  earnings  and  computed  using the  specific  identification  cost
          method.

          Business Risk and Credit Concentration

          A majority of the Company's  revenues are derived from product  sales,
          which  consist  entirely of sales in the United States under a license
          agreement with SmithKline Beecham Corporation ("SB") (see Note 3). Any
          factor  adversely  affecting demand for, or supply of, the psychiatric
          products covered by the license  agreement could materially  adversely
          affect the Company's business and financial performance.

                                      F-7
<PAGE>

          The  Company's  excess cash is invested in a  diversified portfolio of
          securities  consisting of United States Treasury  Notes, deposits with
          major banks  and  financial  institutions,  and  in  investment-grade
          interest-bearing corporate securities issued by companies in a variety
          of industries.

          Depreciation and Amortization

          Buildings  and equipment  are stated at cost and are depreciated using
          the straight-line method over the estimated useful lives of the assets
          (3 to 7 years  for equipment  and 40 years for  buildings).  Leasehold
          improvements are  amortized  on a straight-line basis over the shorter
          of the asset life or fixed-lease term.

          Product Sales

          Revenue from sales of certain psychiatric products (the "SB Products")
          under license from SB (see Note 3)  is  recognized  in  the  period in
          which the products are  shipped.  Provision  is  made  for  estimated
          returns and allowances, cash discounts and  rebates  attributable  to
          Medicaid programs.

          Co-promotion Commissions

          Revenue from co-promotion commissions (see Note 3) is recognized based
          on estimated sales levels of Ortho-McNeil Pharmaceutical's psychiatric
          product HALDOL(R) Decanoate and Wyeth-Ayerst Laboratories' psychiatric
          product EFFEXOR(R) (venlafaxine  HCl) for their  respective  contract
          years.

          Contract Revenues

          Research and  development contract  revenues  from  cost-reimbursement
          agreements are recorded as the related  expenses are  incurred,  up to
          contractual limits.  Payments  received  that are  related  to  future
          performance are  deferred  and recorded as revenues as they are earned
          over specified future  performance  periods.  Research and development
          payments for which no services  are  required to be  performed  in the
          future, license payments irrevocably received and royalty payments due
          form licensees  based  on sales to third  parties  are  recognized  as
          revenues upon receipt. Research and development expenses in 1997, 1996
          and 1995 include approximately  $2.1  million,  $1.9 million and $1.4
          million, respectively, incurred in connection with programs subject to
          cost reimbursement, collaborative or other performance agreements.

          Per Share Data

          Effective  December 31, 1997, the Company adopted Financial Accounting
          Standards No. 128 ("SFAS 128"), "Earnings Per Share" and  accordingly,
          all prior periods  presented  have been  restated.  Basic net loss per
          share is calculated using the weighted average number of common shares
          outstanding for the period.  Diluted net loss per share is  calculated
          using the  weighted  average  number  of common  and  dilutive  common
          equivalent shares  outstanding  during the period.  Common  equivalent
          shares are  excluded  from the  computation  of net  loss  per  common
          share-assuming dilution as their effect is antidilutive.

          Stock Based Compensation

          The Company accounts for stock based compensation  using the intrinsic
          value method prescribed by APB Opinion No. 25,  "Accounting  for Stock
          Issued to Employees." Accordingly, compensation cost for stock options
          is measured as the excess, if any, of the quoted  market  price of the
          Company's stock at the date of the grant over the  amount an  employee
          must pay  to  acquire   the  stock.   The  Company  has  adopted  the
          disclosure-only  provisions  of  Statement  of  Financial  Accounting
          Standards No. 123, "Accounting for Stock-Based Compensation."

          Treasury Stock

          Treasury  stock  is  stated  at  cost  and  is  considered  issued  
          and outstanding.

                                      F-8
<PAGE>

          Fair Value of Financial Instruments

          Carrying amounts  of certain of the  Company's  financial  instruments
          including cash and cash  equivalents,  accounts  receivable,  accounts
          payable and other accrued  liabilities  approximate  fair value due to
          their short maturities.  Based on borrowing rates currently available 
          to the Company for loans with similar terms, the carrying value of 
          notes payable and capital lease obligations  approximates fair  value.
          Estimated fair values for marketable securities,  which are separately
          disclosed elsewhere, are based on quoted market prices for the same or
          similar instruments.

          Recent Pronouncements

          In June 1997, the Financial Accounting Standards Board issued State-
          ment of Financial Accounting  Standards  No. 130 ("SFAS  130"),
          "Reporting Comprehensive Income." This statement establishes require-
          ments for disclosure of comprehensive income and becomes effective for
          the Company for the fiscal year, beginning after December 15, 1997,
          with reclassification of earlier financial statements for comparative
          purposes.  Comprehensive income  generally  represents  all changes in
          stockholders'  equity  except  those  resulting  from  investments  or
          contributions by stockholders.  The Company is evaluating  alternative
          formats for presenting this information,  but does not expect  this
          pronouncement to materially impact the Company's results of 
          operations.

          In June 1997,  the Financial  Accounting  Standards Board  issued 
          Statement of Financial  Accounting  Standards No. 131 ("SFAS 131"),  
          "Disclosures about Segments of an Enterprise and Related Information."
          This statement establishes  standards for disclosure about operating 
          segments in annual financial statements and selected  information  in 
          interim financial   reports.   It  also   establishes   standards  for
          related disclosures about products and services,  geographic  area and
          major customers.  This statement supersedes Statement of Financial 
          Accounting Standards No. 14,  "Financial Reporting for  Segments of a 
          Business Enterprise."  The new standard  becomes  effective  for the 
          fiscal year beginning  after  December 15,  1997,  and  requires  that
          comparative information from earlier years  be  restated  to  conform
          to  the requirement of this standard.   The Company is evaluating  the
          requirements of SFAS 131 and the  effects,  if any,  on the  Company's
          current reporting and disclosures.


 3.     Joint Business Arrangements
        ---------------------------

        a.  Agreement with SmithKline Beecham Corporation

        Under the terms of an agreement  with SB, the Company has the  exclusive
        rights to market certain SB Products in the United  States.  SB is fully
        responsible for ancillary  matters  relating to sales of the SB Products
        (including  various  administrative  tasks), for the maintenance in good
        standing of all New Drug  Applications  with  respect to the SB Products
        and for the  maintenance of certain  product  liability  insurance.  The
        Company pays SB 40% of net profits,  as defined in the  agreement,  from
        sales of the SB Products.

        b.  Agreement with Ortho-McNeil Pharmaceutical

        In July 1993,  the  Company  entered  into a  five-year  agreement  with
        Ortho-McNeil Pharmaceutical ("Ortho-McNeil"),  an affiliate of Johnson &
        Johnson,  to jointly  promote  the  injectable  antipsychotic  HALDOL(R)
        Decanoate  in the  United  States.  Under  the  agreement,  the  Company
        receives  payments  based on  achieving  specified  sales  levels over a
        contract  year  beginning  in August  and  ending in July.  Ortho-McNeil
        manufactures  and distributes the product.  The agreement is expected to
        end in 1998.

                                      F-9
<PAGE>



        c.  Agreements with Wyeth-Ayerst Laboratories

        In April 1996,  the Company  entered  into a  four-year  agreement  with
        Wyeth-Ayerst  Laboratories  ("Wyeth-Ayerst"),  an  affiliate of American
        Home  Products  Corporation,  to promote the  antidepressant  EFFEXOR(R)
        (venlafaxine HCl) to selected  psychiatrists in the United States. Under
        the  agreement,   the  Company  receives  payments  based  on  achieving
        specified  increases  in sales  to the  selected  psychiatrists  over an
        adjusted  base  level  during  each  contract  year  beginning  in June.
        Wyeth-Ayerst manufactures and distributes the product. The agreement may
        be  terminated  by either party  during the  contract  period if certain
        sales targets are not met.

        In October 1996, the Company entered into a collaboration agreement with
        Wyeth-Ayerst  for  the  joint  development  and   commercialization   of
        FIBLAST(R)  trafermin  ("FIBLAST") for the treatment of neurological and
        cardiovascular  disorders.  The two companies will co-promote FIBLAST(R)
        for these  indications in North America and share  development costs and
        profits.  Wyeth-Ayerst received exclusive marketing rights outside North
        America except for certain Pacific Rim countries in return for a royalty
        on sales and payments for bulk drug supply  worldwide.  Wyeth-Ayerst has
        provided a $12.0 million line of credit that the Company may use to fund
        expansion of its manufacturing facility for FIBLAST (see Note 9).

        d.  Agreement with Genentech, Inc.

        In December 1994,  the Company  entered into a  collaboration  agreement
        with   Genentech,   Inc.   ("Genentech")   for   the   development   and
        commercialization  of  AURICULIN(R)  anaritide   ("AURICULIN")  for  the
        treatment  of acute renal  failure.  Concurrent  with the  collaboration
        agreement,  Genentech  purchased $20.0 million of Scios preferred stock,
        convertible  into  approximately  2.1 million shares of common stock and
        provided a $30.0  million loan to the Company in the form of a letter of
        credit  (see Note 9) which the company  drew down in March of 1997.  The
        loan plus accrued  interest is payable in cash or stock or a combination
        thereof. As of December 31, 1997,  Genentech had converted all shares of
        preferred  stock  into  common  stock.  In  1997,  Scios  and  Genentech
        suspended development of AURICULIN based upon the negative results of an
        interim study.

        e.  Agreements with Kaken Pharmaceutical Co., Ltd.

        In September  1994, the Company entered into a series of agreements with
        Kaken  Pharmaceutical Co., Ltd. ("Kaken") to expand a previous agreement
        signed in 1988 for FIBLAST.  Under the 1994 agreements, the Company will
        collaborate with Kaken to  further   develop  the  FIBLAST manufacturing
        process, provide Kaken a license to the Company's FIBLAST  manufacturing
        technology and supply FIBLAST  product. In  return,  the  Company  will 
        receive milestone payments which  are  contingent  on Kaken's continuing
        development of the product. On December 31, 1997, $11.5 million  of the 
        Company's deferred revenue consisted of payments received to date under 
        these agreements.

        f.  Agreement with Eli Lilly and Company

        In May 1997, the Company entered into a research  collaboration with Eli
        Lilly and Company  ("Lilly") for the  development of drugs to prevent or
        retard the  progression of Alzheimer's  disease.  Under the terms of the
        agreement,  Lilly  will fund  research  at Scios and will have the first
        opportunity to develop products from the collaboration.  Scios may elect
        to develop other products from the collaboration.  The commercialization
        partner will make milestone and royalty payments to the other partner.

4.      Affiliate
        ---------

        In June 1994,  Guilford,  then a  fully-consolidated  subsidiary  of the
        Company,  completed  an initial  public  offering  which  decreased  the
        Company's  ownership from 62% to 29%. As a result,  the equity method of
        accounting  was adopted by the Company.  Prior to the date of the public
        offering, the financial results of Guilford were fully consolidated with
        those of the Company. Due to subsequent public stock offerings,  and the
        sale by the  Company of  200,000  shares of  Guilford  stock in 1996 and
        12,500  shares in 1997,  the  Company's ownership in Guilford  has  been
        reduced to 7%. The Company has  continued  to use the equity  method  of
        accounting for its investment in Guilford because it has  representation
        on Guilford's Board of Directors.

                                      F-10
<PAGE>

 5.     Marketable Securities
        ---------------------

        Unrealized  gains and losses on  marketable  securities  at December 31,
        1997 by classification were as follows:
<TABLE>
<CAPTION>

                                                                 Unrealized     Unrealized
        (in thousands)                      Cost Basis           Gains          Losses           Fair Value
                                            ----------           -----          ------           ----------
        <S>                                   <C>                <C>            <C>                 <C>
        Debt securities:
          U.S. Government &
          Government Agency
          securities                          $24,915            $100           $  (5)              $25,010

          Corporate Bonds                      29,300             112             (14)               29,398

       Equity investments                          --              95              --                    95
                                              -------             ---           -----                    --

           Total                              $54,215            $307           $ (19)              $54,503
                                              =======            =====           =====              =======
</TABLE>

        Unrealized  gains and losses on  marketable  securities  at December 31,
        1996 by classification were as follows:
<TABLE>
<CAPTION>

                                                                Unrealized      Unrealized
        (in thousands)                      Cost Basis          Gains           Losses           Fair Value
                                            ----------          -----           ------           ----------
        <S>                                    <C>              <C>             <C>                 <C>
        Debt securities:
          U.S. Government &
          Government Agency
          securities                           $45,679           $47            $(224)              $45,502

          Corporate Bonds                       14,974            32              (49)               14,957

       Equity investments                           --           124               --                   124
                                               -------          ----             ----                ------

             Total                             $60,653          $203            $(273)              $60,583
                                               =======         =====             =====              =======
</TABLE>

        At December 31, 1997, scheduled maturities for debt securities were less
        than  one year for  $13,322,000  and  between  one and  five  years  for
        $41,086,000.

        The Company  realized  gains of  $176,000  and losses of $298,000 on the
        disposal of marketable  securities during 1997 and gains of $279,000 and
        losses  of  $379,000  on  the  disposal  and  write-down  of  marketable
        securities during 1996.

                                      F-11
<PAGE>

 6.     Property and Equipment
        ----------------------
<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
         (in thousands)                                          1997               1996
                                                                 ----               ----
          <S>                                                    <C>                <C>
          Laboratory equipment                                   $11,880            $10,408
          Computer and related equipment                           4,103              3,136
          Furniture and other                                      2,421              2,239
          Buildings and building improvements                     48,951             47,253
                                                                  ------            -------
                                                                  67,355             63,036
          Accumulated depreciation and
              amortization                                       (35,125)           (29,424)
                                                                 -------            -------
                                                                  32,230             33,612
          Construction in progress                                 1,353              3,227
                                                                  ------            -------
                                                                 $33,583            $36,839
                                                                 =======            =======
</TABLE>
 
 7.     Other Assets
        ------------
<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
          (in thousands)                                         1997               1996
                                                                 ----               ----
          <S>                                                    <C>                <C>
          Deposits                                               $  387             $  193
          Other assets                                              188                216
          Equity investments                                      1,067              1,000
          Employee notes receivable                                 594              1,010
                                                                   ----              -----
                                                                 $2,236             $2,419
                                                                 ======             ======
</TABLE>

 8.     Other Accrued Liabilities
        -------------------------
<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
          (in thousands)                                         1997               1996
                                                                 ----               ----
          <S>                                                    <C>                <C>
          Accrued Medicaid rebates                               $ 1,191            $ 1,393
          Accrued payroll                                          2,881              3,502
          Profit distribution to third parties                     1,911              1,210
          Accrued clinical trial expenses                            200                832
          Accrued royalties payable                                   51              1,790
          Deferred equity purchase                                 3,000                 --
          Other                                                    1,900              1,284
                                                                  ------             ------

                                                                 $11,134            $10,011
                                                                 =======            =======
</TABLE>


 9.     Lease and Debt Commitments
        --------------------------

        a. Operating leases

        The Company leases facilities in California and the  land  on  which the
        Company's  Mountain  View,  California  facilities  are  located   under
        operating leases. The long-term ground lease expires in 2053.  Beginning
        in July 2010,  a  portion  of  the  annual  ground  rent  is  subject to
        renegotiation.  In  addition,  the  Company  has  entered into operating
        leases covering certain laboratory and computer equipment.

                                      F-12
<PAGE>

        Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>

                                                              Land and
                                                            Facilities                     Equipment
                                                             Operating                     Operating
             (in thousands)                                     Leases                        Leases
                                                                ------                        ------
             <S>                                                <C>                           <C> 
             1998                                               $  910                        $538
             1999                                                  944                         327
             2000                                                  980                          --
             2001                                                1,016                          --
             2002                                                  268                          --
             Thereafter                                          1,855                          --
                                                                 -----                        ----
                                                                $5,973                        $865
                                                                ======                        ====
</TABLE>

             Rent expense for all facilities  operating leases was approximately
             $1,112,000,  $1,177,000  and  $456,000  in  1997,  1996  and  1995,
             respectively.


          b. Borrowing arrangements

          At December 31, 1997,  the Company's  debt  consisted of two five-year
          notes,  secured by equipment,  at interest rates of 9.9% and 9.8%, due
          in April 1998 and October 1998,  respectively.  Under the terms of the
          notes,  the  Company  is  required  to  maintain   certain   covenants
          concerning minimal tangible net worth,  current ratio,  liabilities to
          net worth ratio and minimum cash and marketable securities balances.

          In December  1997,  the Company  repaid a $3 million bank loan entered
          into in 1995 and renewed in 1996.

          As part of the AURICULIN  agreement,  Genentech  committed to loan the
          Company up to $30 million.  The $30 million was drawn down in March of
          1997,  and bears  interest at the prime rate (8.5% at December  1997).
          The loan and accrued  interest is  repayable  in cash or Scios  common
          stock, at the prevailing  market price, at the Company's option at any
          time through December 31, 2002.

          c. Wyeth-Ayerst loan commitment

          As part of the  FIBLAST agreement, Wyeth-Ayerst has committed  to loan
          the Company up to $12  million  to  fund  expansion  of  the Company's
          manufacturing  facility  for  FIBLAST.  The  loan  can  be drawn  down
          through the year 2004,  and will bear  interest at the one-year  LIBOR
          rate plus  0.225%  (5.894% at  December  31,  1997).  No amounts  were
          outstanding under the agreement at December 31, 1997.

10.       Litigation
          ----------

          On December 10, 1997, the Company announced that the plaintiffs in the
          securities class action against the Company had dismissed their appeal
          of a September  1996  Federal  Court  judgment in favor of Scios.  The
          judgment in the United States District Court for the Northern District
          of California  dismissed  with prejudice a lawsuit that had been filed
          by certain  stockholders  in May, 1995 against the Company and Richard
          L. Casey, its chairman and chief executive  officer,  on behalf of the
          individual  plaintiffs  and  on  behalf  of  other  purchasers  of the
          Company's stock during the period from October 6, 1993 to May 2, 1995.
          The action alleged  violations of federal  securities  laws,  claiming
          that  the   defendants   issued  a  series  of  false  and  misleading
          statements,   including  filings  with  the  Securities  and  Exchange
          Commission,  regarding  the  Company  and  clinical  trials  involving
          AURICULIN.

          On November  29, 1995,  the Company was notified by the United  States
          Environmental  Protection  Agency ("EPA") that it may have a liability
          in  connection  with the clean-up of a toxic waste site arising out of
          the alleged  disposal of hazardous  substances by a  subcontractor  of
          Nova Pharmaceutical  Corporation,  which the Company acquired in 1992.
          The Company is one of many potentially  responsible  parties that have
          been  identified as associated with this specific site. The Company is
          in  discussions  with the EPA to  finalize  the  amount  of  potential
          liability.

                                      F-13
<PAGE>

11.       Research and Development Commitments
          ------------------------------------

          a. Research commitments

          The  Company's   commitments  for  research  sponsorship  payments  to
          collaborators  and  institutions  during 1998, 1999 and 2000 aggregate
          approximately $82,000.

          b. Commitments to research partnerships

          Under the Company's  collaboration agreement with Wyeth-Ayerst for the
          development and commercialization of FIBLAST, the Company is obligated
          to  pay  30%  of  the  joint   development  expenses with Wyeth-Ayerst
          responsible for the remaining 70%.

          In 1988, the Company exercised its option to purchase the interests of
          Biotechnology  Research  Partners,  a limited  partnership  in a joint
          venture  and made a down  payment  of  $575,000.  The  balance  of the
          purchase price is to be paid in quarterly  installments  in accordance
          with the  following  formula:  (i) until the  minority  partners  have
          received payments of approximately $22.8 million, the Company will pay
          approximately 37% of the royalty income from third-party  licenses and
          approximately  3.7%  of  the  Company's  gross  sales  of  Partnership
          products;  (ii) thereafter,  until the minority partners have received
          aggregate  payments of approximately  $34.1 million,  the Company will
          pay approximately 31% of the royalty income and approximately  3.1% of
          the  Company's  gross  sales  of  Partnership   products;   and  (iii)
          thereafter, until the earlier of 20 years from the date of exercise of
          the  option  or the time all  patents  relating  to the  Partnership's
          technology  expire and all  information  relating  to that  technology
          becomes  part  of the  public  domain,  the  Company  will  pay to the
          minority  partners  approximately  20.5%  of the  royalty  income  and
          approximately 2% of the Company's gross sales of Partnership products.
          Partnership products for which minority partners will receive payments
          include AURICULIN and FIBLAST.

          In  December  1992,  the Company  exercised  its option to acquire all
          interests in Nova  Technology  Limited  Partnership for $20.4 million.
          The  Company  also  issued  contingent  payment  rights to all limited
          partners  of  the  partnership,  pursuant  to  which  the  Company  is
          obligated  until  January  15,  2008 to pay  royalties  on the sale or
          license  of  certain  products  that  were  under  development  by the
          partnership.  As of December 31, 1997, $51,000 was accrued for payment
          in 1998 as a result of royalties associated with the commercialization
          of Guilford Pharmaceuticals' GLIADEL(R) wafer.

12.       Stockholders' Equity
          --------------------

          At  December  31,  1997,   warrants  were   outstanding   to  purchase
          approximately  789,000 shares of the Company's  common stock at $26.74
          per share and are exercisable through June 1998.

          a. Convertible preferred stock

          The Company's convertible preferred stock may be issued in series that
          have such rights as may be designated  by the Board of Directors  from
          time to time.  There  were no shares of  preferred  stock  issued  and
          outstanding at December 31, 1997. In 1997,  Genentech converted 12,632
          shares of preferred stock into 1,263,200 shares of common stock.

                                      F-14
<PAGE>

          b. Common Stock

          The  Company  has a Common  Share  Purchase  Rights  Plan under  which
          stockholders  have a right to purchase for each share held,  one share
          of the  Company's  common  stock at a 50%  discount  and,  in  certain
          circumstances,  a share of common  stock of an  acquirer  at a similar
          discount.  The rights become exercisable,  at $55.00 per right, in the
          event  of  an  acquisition  or  tender  offer  which  results  in  the
          acquisition of 20% or more of the Company's  common stock.  The rights
          may be  redeemed,  in  certain  circumstances,  at $0.01 per right and
          expire on July 31, 2000.

13.       Employee Benefits and Stock Option Plans
          ----------------------------------------

          The  Company  has a  qualified  profit  sharing  plan and trust  under
          Internal  Revenue Service Code sections  401(a) and 401(k).  Employees
          are  eligible  to  participate  in the plan the first day of the month
          after hire and can elect to contribute to the plan up to 15% of salary
          subject to current  statutory  limits.  In 1997,  the Company  matched
          employee  contributions  at a rate of 100% to a maximum  of $3,000 per
          employee,  except as  restricted  by  statutory  limits.  The  Company
          contribution is 100% vested at the end of an employee's  third year of
          employment.  Company  contributions to the plan totaled  approximately
          $664,000 in 1997, $649,000 in 1996 and $633,000 in 1995.

          Under the Company's stock option plans, the Board of Directors has the
          authority to determine to whom options will be granted,  the number of
          shares,  the vesting  period and the exercise  price (which  cannot be
          less  than fair  market  value at date of grant  for  incentive  stock
          options or 85% of fair market value ("FMV") for nonstatutory options).
          To date,  the Company has only granted  options at prices equal to the
          fair  market  value  at  the  time  of  the  grant.  The  options  are
          exercisable  at times and in  increments  as specified by the Board of
          Directors,  generally  expire  ten years  from date of grant and fully
          vest over periods from three to five years.  The following  shares are
          authorized and available for grant as of December 31, 1997:
<TABLE>
<CAPTION>
                                                                 Shares
      Plan                   Shares           Options         Available
      Title              Authorized       Outstanding         for Grant                  Option Price
      -----              ----------       -----------         ---------                  ------------
      <S>                <C>              <C>                 <C>                        <C>    
      1983/86            2,200,000        939,027                    --                  Not less than 85% of FMV
      1989                 170,000         25,000                    --                  Fair Market Value
      1992               5,000,000      2,461,765             1,793,121                  Not less than 85% of FMV
      1996                 700,000        560,350               134,848                  Not less than 85% of FMV
      NQ                   443,161             --                    --                  Not less than 85% of FMV
</TABLE>

                                      F-15
<PAGE>

       Additional  information  with  respect  to the  activity  of  outstanding
options is summarized in the following table:
<TABLE>
<CAPTION>
                                                            Number of                           Aggregate
       Common Stock                                            Shares       Option Price            Price
       ------------                                            ------       ------------            -----
                                                                                             (in thousands)
       <S>                                                  <C>             <C>                 <C>   
       Balances at December 31, 1994                        3,694,835       $0.16-$21.13        $28,259

         Granted                                              780,580       $3.50-$ 7.50          5,512
         Exercised                                           (123,171)      $0.16-$ 7.13           (512)
         Canceled                                            (520,701)      $2.56-$21.13         (4,237)
                                                            ---------      ------------         -------

       Balances at December 31, 1995                        3,831,543       $2.56-$21.13        $29,022

         Granted                                              627,000       $4.56-$ 6.88          3,579
         Exercised                                           (155,142)      $2.56-$ 7.13           (594)
         Canceled                                            (527,078)      $3.50-$21.13         (3,797)
                                                             --------       ------------        -------

       Balances at December 31, 1996                        3,776,323       $3.50-$21.13        $28,210

         Granted                                              819,740       $6.06-$ 8.13          5,266
         Exercised                                           (262,621)      $4.13-$ 9.13         (1,641)
         Canceled                                            (347,300)      $5.44-$15.06         (2,491)
                                                             --------       ------------        -------

       Balances at December 31, 1997                        3,986,142       $3.50-$21.13        $29,344
                                                            =========       ============        =======
</TABLE>

        The following  pro forma  information  has been  prepared  following the
        provisions of SFAS No. 123 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                                 ------------
        (in thousands, except per share amounts)                   1997              1996            1995
                                                                   ----              ----            ----
        <S>                                                        <C>               <C>             <C> 
        Net loss - as reported                                    ($38,667)         ($18,403)       ($26,382)

        Net loss - pro forma                                       (40,163)          (19,029)        (26,617)

        Net loss per common share                                   ($1.07)           ($0.51)         $(0.74)
          and per common share -
          assuming dilution -
          as reported

        Net loss per share                                          ($1.10)           ($0.53)         $(0.74)
          and per common share -
          assuming dilution -
          pro forma
</TABLE>

                                      F-16
<PAGE>

        The fair value of each option  grant is  estimated on the date of grant
        using the  Black-Scholes  single  option  pricing  method  assuming the
        following parameters:

<TABLE>
<CAPTION>

         December 31,                                              1997              1996            1995
         -------------------------------------------------------------------------------------------------------------
         <S>                                                       <C>               <C>             <C>    
         Risk free interest rate                                   5.87              6.41            6.41
         Expected life (years)                                        5                 5               5
         Volatility                                               .7920             .8134           .8134
         Dividend yield                                              --                --              --
</TABLE>

        The  weighted  average fair value of options  granted in 1997,  1996 and
        1995 was $4.33, $3.92 and $4.88 respectively.


        The impact on pro forma loss per share and net loss in the table  above
        may not be  indicative  of the effect in future  years as options  vest
        over several years and the Company  continues to grant stock options to
        employees. This policy may or may not continue.


        The options  outstanding by range of exercise price at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>

       December 31, 1997
                                                                        Weighted
                                            Number of                    Average                        Weighted
                                              Options                  Remaining                        Average
       Exercise Price                     Outstanding           Contractual Life                 Exercise Price
       --------------                     -----------           ----------------                 --------------
       <S>                                <C>                            <C>                         <C>  
       $3.50-$ 6.13                       1,170,118                      7.93                        $  5.74
       $6.25-$ 7.00                         528,664                      2.60                        $  6.74
       $7.13-$ 7.13                         907,412                      4.81                        $  7.13
       $7.21-$ 9.00                         850,890                      6.96                        $  7.84
       $9.13-$21.13                         529,058                      4.00                        $ 11.20
       ------------                       ---------                      ----                         ------
       $3.50-$21.13                       3,986,142                      5.78                        $  7.36
       ============                       =========                      ====                        =======
</TABLE>
<TABLE>
<CAPTION>

       December 31, 1996
                                                                        Weighted
                                            Number of                    Average                       Weighted
                                              Options                  Remaining                        Average
       Exercise Price                     Outstanding           Contractual Life                 Exercise Price
       --------------                     -----------           ----------------                 --------------
       <S>                                  <C>                            <C>                         <C> 
       $3.50-$ 6.13                           789,066                      7.83                        $  5.47
       $6.50-$ 7.00                           674,932                      3.36                        $  6.81
       $7.13-$ 7.13                           919,190                      5.75                        $  7.13
       $7.21-$ 9.00                           837,696                      7.53                        $  7.82
       $9.13-$21.13                           555,439                      4.91                        $ 11.15
       ------------                         ---------                      ----                         ------
       $3.50-$21.13                         3,776,323                      6.03                        $  7.47
       ============                         =========                      ====                        =======
</TABLE>

                                      F-17
<PAGE>


        The options currently exercisable by range of exercise price at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
       December 31, 1997
                                                                    Number of                  Weighted
                                                                      Options                   Average
       Exercise Price                                             Exercisable            Exercise Price
       --------------                                             -----------            --------------
       <S>                                                          <C>                         <C>  
       $3.50-$ 6.13                                                   461,127                   $ 5.74
       $6.50-$ 7.00                                                   423,078                   $ 6.82
       $7.13-$ 7.13                                                   897,912                   $ 7.13
       $7.21-$ 9.00                                                   243,157                   $ 8.08
       $9.13-$21.13                                                   529,058                   $11.20
       ------------                                                 ---------                   ------
       $3.50-$21.13                                                 2,554,332                   $ 7.76
       ============                                                 =========                  =======
</TABLE>
<TABLE>
<CAPTION>

       December 31, 1996
                                                                    Number of                  Weighted
                                                                      Options                   Average
       Exercise Price                                             Exercisable            Exercise Price
       --------------                                             -----------            --------------
       <S>                                                          <C>                         <C> 
       $3.50-$ 6.13                                                   297,180                   $ 5.67
       $6.50-$ 7.00                                                   530,103                   $ 6.82
       $7.13-$ 7.13                                                   752,723                   $ 7.13
       $7.21-$ 9.00                                                   243,598                   $ 8.12
       $9.13-$21.13                                                   539,710                   $11.16
       ------------                                                 ---------                   ------
       $3.50-$21.13                                                 2,363,314                   $ 7.90
       ============                                                 =========                  =======
</TABLE>

14.     Significant Customers
        ---------------------

        In 1997 and 1995, no  individual  customer or partner  contributed  more
        than 10% of total  revenues.  In 1996,  Wyeth-Ayerst  contributed 21% of
        total revenues.

        At December 31, 1997, the $5.2 million in accounts  receivable  included
        the following receivables  associated with Commercial  Operations:  $0.6
        million  from  Ortho-McNeil,  $0.9 million  from  Wyeth-Ayerst  and $3.2
        million from SB.

15.     Income Taxes
        ------------

        The Company's  deferred tax assets and liabilities are determined  based
        on the  difference  between  the  financial  statement  and tax bases of
        assets and liabilities using enacted tax rates in effect for the year in
        which the differences  are expected to affect taxable income.  Valuation
        allowances are established  when necessary to reduce deferred tax assets
        to the amounts expected to be realized.

        The Company has federal and state income tax net operating  loss ("NOL")
        and research credit  carryforwards at December 31, 1997 for tax purposes
        available as follows:

        FederalNOL                                             $275,000,000
        State NOL                                                 9,600,000
        Federal Research Credit                                  10,200,000
        State Research Credit                                     3,000,000

        These  federal  and state  NOL  carryforwards  expire in the years  1998
        through 2012, and 1998 through 2002, respectively. The federal and state
        research credit carryforwards expire in the years 1998 through 2012, and
        2002 through 2012, respectively.

                                      F-18
<PAGE>

        Due to a change in the ownership of the Company,  as defined,  a portion
        of  the  federal  and  state  NOL  carryover  is  subject  to an  annual
        utilization limitation. Should another change in ownership occur, future
        utilization  of  the  Company's  NOL  carryforwards  may be  subject  to
        additional limitations.

        The tax effects of temporary  differences  that give rise to significant
        portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
        (in thousands)                                                 1997                                1996
                                                                  -----------                         --------
        <S>                                                       <C>                                 <C>    
        Depreciable and amortizable
          assets, primarily technology                            $   7,900                           $   8,500
        Other accrued liabilities                                     4,800                               3,400
        State (net of federal benefit)                                8,800                               7,000
        Net operating loss carryforward                              93,600                              84,600
        Research credit                                              10,200                               9,500
        Valuation allowance                                        (125,300)                           (113,000)
                                                                  ---------                             --------

        Net deferred tax asset                                    $     --                            $      --
                                                                  =========                           ==========
</TABLE>

        Due to the uncertainty  surrounding the realization of the favorable tax
        attributes  in future tax  returns,  the  Company has placed a valuation
        allowance against its otherwise recognizable net deferred tax assets.

                                      F-19
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