===============================================================================
                       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, 1998
                                       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
                            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, 1999 was $354,094,819.

As of March 16, 1999,  37,770,114  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 1999 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. An NDA for the use of Natrecor(R)
(nesiritide)  for the  short-term  management  of  congestive  heart  failure is
pending with the U.S. Food and Drug Administration ("FDA"). On January 29, 1999,
the  Cardiovascular  and Renal Drugs Advisory  Committee to the FDA  recommended
that the FDA  approve  Natrecor(R)  for sale in the  United  States.  Fiblast(R)
(trafermin)  is in Phase  II/III  clinical  trials in Europe  for stroke and the
Company  plans to do  additional  Phase II  clinical  trials for other  vascular
indications.

    Scios is seeking to reach  profitability  in the next several  years through
the launch of Natrecor(R),  cost reductions,  funding from  collaborations  with
corporate  partners on other products and the acquisition of late stage products
that it can market.  In March 1999,  the  Company  announced a reduction  in its
workforce,  termination of its manufacturing operations and consolidation of its
headquarters,  development and research staff in leased facilities in Sunnyvale.
These steps are  expected to save  approximately  $14 million  annually.  In the
quarter  ending  March 31,  1999,  the  Company is expected to record a one-time
restructuring  charge of approximately $7 million for the disposition of certain
assets and severance  costs. The elimination of the  manufacturing  operation in
Mountain View was due mainly to the  facility's  low capacity and high operating
expense and the  Company's  belief that  recombinant  protein  manufacturing  is
available from third parties.  Scios will maintain process science personnel and
pilot scale manufacturing capability in order to develop protein products in its
pipeline. As part of the restructuring, the Company also announced plans to sell
its Mountain View campus  following the  relocation of its  operations to leased
space in Sunnyvale.  Subsequently,  the Company signed a letter of intent with a
prospective purchaser of the Mountain View facility.

    The Company  currently  focuses its  proprietary  research  and  development
efforts primarily in the areas of cardiorenal  disorders,  inflammatory  disease
and Alzheimer's disease. The Company has research and development collaborations
with  Bayer  AG,  Wyeth-Ayerst  Laboratories,  the  pharmaceutical  division  of
American   Home   Products   Corporation,   Eli   Lilly  and   Company,   DuPont
Pharmaceuticals  Company,  Kaken Pharmaceutical Co., Ltd., and Novo Nordisk A/S.
More detail  regarding  these  relationships  is provided  below in "Business --
Products in Development."

    Scios' collaborator on Natrecor(R) is Bayer AG ("Bayer"). In May 1998, Bayer
and Scios entered into an exclusive  worldwide  strategic  alliance  under which
Bayer will market  Natrecor(R)  (nesiritide)  for the  short-term  treatment  of
congestive  heart failure ("CHF").  Under the agreement,  Scios will continue to
manage the production of Natrecor(R) and most of the Phase IIIb clinical trials,
with Bayer managing  further  worldwide  development  and  commercialization  of
Natrecor(R).  Scios  received  an  up-front  cash  payment  of $20  million  and
additional  cash  milestone  payments  of  up to  $40  million  upon  regulatory
approvals in the United States,  Europe and Japan. Scios will receive additional
payments  based on annual sales for  supplying  Natrecor(R),  which  reflect its
advanced stage of development and regulatory status. The agreement also provides
Scios the option to participate in co-promotion of Natrecor(R) in the U.S. after
three years upon  achievement  of specified  sales  levels,  and it provides for
Scios to actively participate in the further development of Natrecor(R).

    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
initiated  separate Phase II/III  clinical trials in Europe and North America to
evaluate  Fiblast(R)  for the  treatment  of stroke.  In July 1998,  the Company
announced  the  termination  of the North  American  clinical  trial for  safety
reasons.  An interim analysis is being conducted of data from  approximately 350
patients in the European  stroke trial and results of this analysis are expected
to be announced in midyear.  Termination  of the North  American  stroke  trial,
despite indications of success in earlier animal and human studies, demonstrates
the challenges and risks  inherent in the Company's  business of  pharmaceutical
development.
<PAGE>

    The  Company  also  has  a  Commercial   Operations   Division  which  sells
third-party  psychiatric  products  in the United  States  utilizing a flex-time
sales  force.  The product line  includes  five  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).  For part of 1998, the Scios sales force marketed
Haldol(R)  Decanoate  (haloperidol) for Ortho-McNeil  Pharmaceutical,  until the
parties  terminated  their  agreement in April,  1998 when a generic form of the
product entered into the market,  and Effexor(R)  (venlafaxine  HCI),  which was
co-promoted with Wyeth-Ayerst  until April, 1998 when the parties terminated the
Effexor(R)  agreement.  Subsequently  in 1998, the Company  entered into two new
co-promotion agreements - an agreement to co-promote Risperdal(R)  (resperidone)
with Janssen  Pharmaceutica  Inc.  ("Janssen")  and an  agreement to  co-promote
Paxil(R) (paroxetine HCL) with SmithKline Beecham Corporation.  See "Business --
Marketing and Sales."

    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.

    The  Company is also  seeking to  supplement  its  product  pipeline  by the
acquisitions or in-licensing of products that represent commercial opportunities
over  the  short-term.  While  market  conditions  at the  present  time  appear
favorable for meeting this objective, there can be no assurance that the Company
will be able to acquire or in-license  products on acceptable terms or that once
acquired such products can be  successfully  developed or that they will achieve
the Company's  revenue  expectations for them. Many companies,  including larger
pharmaceutical  companies  possessing greater resources,  also routinely seek to
in-license  or  acquire   products  and  compete  with  the  Company  for  these
opportunities.

    Until the suspension of the development of Auriculin(R) (anaritide) in 1997,
the Company had expected to achieve  profitability  in 1998 based on development
milestone  and  royalty  payments  related  to that  product  which the  Company
expected  to  receive  from  its  partner,   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  at the time the
statement is made. These forward-looking statements are 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 secure and  retain  third  party  manufacturers  to produce  the
Company's  products in commercial  quantities at reasonable cost and in a manner
acceptable  to various  regulatory  authorities;  (6) the  Company's  ability to
identify and then acquire products that will contribute to the profitable growth
of the Company; and (7) 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" and  "Financial  Risk
Management"  sections of  "Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations."
<PAGE>

    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. Through  approximately August 1999, the principal
executive  offices of the  Company  will be located  at 2450  Bayshore  Parkway,
Mountain View,  California 94043. The telephone number at that location is (650)
966-1550.  Thereafter,  the principal  executive  offices of the Company will be
located at 820 West Maude Avenue,  Sunnyvale,  California  94086.  The telephone
number at the Sunnyvale location is (408) 481-9177.

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     Bayer AG
                              NDA filed
Fiblast(R)(trafermin)         NDA filed (Japan)           Recalcitrant dermal wounds         Kaken Pharmaceutical Co., Ltd.
Fiblast(R)(trafermin)         Phase II/III (Europe)       Stroke                             Wyeth-Ayerst Laboratories
Fiblast(R)(trafermin)         Phase II (on hold)          Peripheral vascular disease        Wyeth-Ayerst Laboratories
Fiblast(R)(trafermin)         Phase II (on hold)          Coronary artery disease            Wyeth-Ayerst Laboratories
VEGF121                       Phase I                     Cardiovascular disease: gene       GenVec, Inc.
                                                          therapy
VEGF121                       Preclinical                 Cardiovascular disease: protein          --
                                                          therapy
p38 inhibitors                Preclinical                 Inflammatory disease                     --
Insulinotropin                Preclinical                 Type 2 diabetes                    Novo Nordisk A/S
Secreted protein therapies    Research                    Cardiorenal disorders                    --
Beta-amyloid modulators       Research                    Alzheimer's disease                Eli Lilly and Company
Beta-amyloid modulators       Research                    Alzheimer's disease                DuPont Pharmaceuticals Company
BNP diagnostic assay          Marketed (Japan & Europe)   Diagnosis/monitoring of heart      Shionogi & Co., Ltd.
                                                          failure
BNP diagnostic assay          Development                 Diagnosis/monitoring of heart      Abbott Laboratories
                                                          failure
BNP diagnostic assay          Development                 Diagnosis/monitoring of heart      Biosite Diagnostics Inc.
                                                          failure
<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,  inflammatory  disease 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  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,  such  as  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 the factors affecting development of the Company's products
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,  proved  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 and manufacture 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) for
the treatment of acute renal failure and with the North American  clinical trial
of Fiblast(R) for the treatment of stroke. See "Business - Additional  Products"
below.
<PAGE>

    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 or its advisors 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,  thereby directly affecting 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.

    The  intellectual  property  rights of third  parties  can also  affect  the
Company's  development  of its products.  For  instance,  patent rights of other
companies  may need to be licensed in order for the Company to  commercialize  a
product. These third party patent rights may not be available for license by the
Company or may be available only at a high cost to the Company.  See "Business -
Patents and  Proprietary  Rights" for a discussion of the patent  positions that
the Company is endeavoring to establish for its products and information on some
of the competing patent positions of third parties.

    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 DuPont  Pharmaceuticals  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  stockholders and
personnel  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)  (nesiritide).  In January 1999,  the  Cardiovascular  and Renal
Advisory  Committee to the FDA recommended by a 5 to 3 vote that  Natrecor(R) be
approved by the FDA for sale in the United States for the short-term  management
of  congestive   heart   failure   ("CHF").   Acute   episodes  of  CHF  require
hospitalization  of  approximately  one  million  people  annually in the United
States. In the Company's clinical studies,  Natrecor(R) produced improvements in
important  measures  of  heart  function:  pulmonary  capillary  wedge  pressure
("PCWP") and cardiac index. The Company filed the new drug  application  ("NDA)"
for Natrecor(R)  with the FDA in April 1998, and the FDA is expected to announce
its decision on the NDA sometime in the second  quarter of 1999.  If approved by
the FDA,  Natrecor(R)  will be the first new short-term  treatment for CHF in 10
years.

    Over 500 patients  have  participated  in Scios'  clinical  program to study
Natrecor(R).  The  pivotal  efficacy  study  was  a  randomized,   double-blind,
placebo-controlled  Phase III study that  studied one  hundred and  twenty-seven
patients  with acutely  decompensated  CHF requiring  hospitalization.  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<0.001)  in the 0.015 and  0.03(mu)g/kg/min  dose  groups,
respectively,  compared  to  placebo.  Symptom  scores  and  cardiac  index also
improved compared to placebo at a statistically significant level.
<PAGE>

    In May 1998, the Company entered into an agreement with Bayer establishing a
collaboration   for  the  worldwide   development   and   commercialization   of
Natrecor(R).  Under the  agreement,  the  Company  will  continue  to manage the
manufacture of Natrecor(R)  and Phase IIIb clinical trials in the United States,
with Bayer managing  further  worldwide  development and  commercialization.  On
signing the contract,  the Company  received a payment of $20.0 million and will
receive up to $40.0 million in milestone  payments upon regulatory  approvals in
the United  States,  Europe and Japan.  The  agreement  provides the Company the
option to  participate  in  co-promotion  of Natrecor(R) in the U.S. after three
years upon  achievement of specified sales levels,  and it provides for Scios to
actively participate in the further development of Natrecor(R) with funding from
Bayer at  specified  minimum  levels.  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  low  cost
pharmaceutical  products  are already  being used by  physicians  to treat acute
episodes of CHF. Hence, the Company and Bayer 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.

    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  commercial  success of  Natrecor(R),  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 Bayer's ability 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
cardiorenal research program in natural human peptides. BNP is made in the heart
and is part of the  body's  natural  response  to a failing  heart.  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.  The Company also has
the  exclusive  right to develop  therapeutic  products  using BNP under certain
patents and applications on BNP originally filed by Daiichi  Pharmaceutical Co.,
Ltd. which were subsequently acquired by Shionogi & Co., Ltd. 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, 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  has  received  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 these  agreements,  Scios will
manufacture a specified quantity of Fiblast(R) for Kaken,  following which Kaken
will arrange its own supply.  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 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 made a series of payments to Scios from 1994 through
1998 for the supply of material, the process development collaboration,  and the
license to Fiblast(R) know-how,  patents and manufacturing technology.  Scios is
endeavoring  to produce the amount of material due to Kaken  before  closing its
Mountain View  manufacturing  facility in May 1999. If Scios does not succeed in
producing the full quantity,  Scios has the option of refunding the amount Kaken
paid for  material  not  delivered  or having the  material  produced by a third
party.
<PAGE>

    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
importation  of  Fiblast(R)  in bulk form from Scios into Japan and 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 the 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."

    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 excluding
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  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.  In July 1998,  Wyeth-Ayerst  and Scios
announced  termination  of the stroke  clinical  trial in the United  States for
safety  reasons.  The stroke  clinical  trial in Europe,  which uses a different
dosing regimen,  was continued.  Results of an interim  analysis of the European
stroke trial are expected by mid-1999 and, if negative, the European trial could
also be terminated.

    Scios  has  also  demonstrated  in  preclinical  studies  the  potential  of
Fiblast(R)  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. Scios and Wyeth-Ayerst  also hope to explore the potential of
Fiblast(R)  to  increase  blood  flow to the  heart in  patients  with  advanced
coronary artery disease  ("CAD").  This could reduce the need for bypass surgery
through the patient's growth of new blood vessels to supply the heart.

    Scios has also granted licenses 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
treatment of bone fractures,  and a license to Selective  Genetics  Incorporated
(formerly  Prizm  Pharmaceuticals,  Inc.), a company using bFGF for the targeted
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 $693,301 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.
<PAGE>

    Vascular   Endothelial   Growth  Factor   (VEGF121).   Scios  is  conducting
pre-clinical studies of its proprietary 121 amino acid form of VEGF ("VEGF121"),
another  potent  angiogenic  substance.  The company  has shown that  VEGF121 is
effective in an animal model of peripheral  vascular disease  following  several
different  modes  of  administration,  including  intravenous  and  subcutaneous
administration.  Scios also  intends to explore the  possible  use of VEGF121 in
coronary artery disease.  The Company has granted a license to GenVec,  Inc. for
the use of the gene  encoding  VEGF121  in gene  therapy  paradigms.  GenVec  is
conducting clinical testing of VEGF121 gene therapy in the U.S. in collaboration
with its partner, Parke-Davis.  Scios has been awarded U.S. and European patents
covering  VEGF121.  Other  companies hold patents on competing forms of VEGF121.
See  "Business -- Patents and  Proprietary  Rights" for a  discussion  of patent
issues.

    p38-kinase  Inhibitors.  The  Company is working to develop  compounds  that
inhibit  specific  cytokines and kinases.  These agents could be useful to treat
certain inflammatory and cardiovascular  conditions.  The Company recently moved
into  preclinical  development  its  lead  candidates  from a  family  of  small
molecules  which  act as  p38-kinase  inhibitors.  The  Company's  research  has
demonstrated  that this family of small molecules  inhibits a key  intracellular
signaling pathway that regulates inflammation,  tissue remodeling, fibrosis, and
joint   destruction.   If  successfully   commercialized,   the  product's  oral
administration  could be a  competitive  advantage in the market that  currently
contains  TNF-inhibitor  products that are taken by injection  for  inflammatory
conditions such as rheumatoid arthritis and inflammatory bowel disease.  Current
development  plans  anticipate  the  initiation of clinical  development  around
mid-2000.

    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 and  anti-inflammatory  applications  and on
agents to  prevent  or delay the onset of  Alzheimer's  disease.  The  Company's
research efforts include the following programs:

    Cardiorenal Disease Genomics. The Company is conducting research to discover
novel genes that are functionally  relevant to cardiac and kidney 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 has
worked 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  beta-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
("Lilly")   and  with  DuPont   Pharmaceuticals   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.  In 1998,  Lilly  expanded  the scope  and  funding  of the
collaboration and extended it through April 2001.

    Previously, Scios had a research alliance on Alzheimer's disease with Marion
Merrell Dow,  Inc.  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.  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.
<PAGE>

    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  ("Novo
Nordisk"), 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.  In 1998,  Scios  received $5 million in time based
payments  from Novo Nordisk.  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 2
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 2 diabetics by
stimulating  insulin  release  and  perhaps by  overcoming  insulin  resistance.
Present  therapies  for Type 2 diabetics  include  insulin  injections  and oral
hypoglycemic  agents, which can induce dangerously low blood sugar levels. Since
insulinotropin appears to stimulate 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 Diagnostics.  Third-party  researchers have determined that the level of
circulating  b-type  natriuretic  peptide  (BNP)  may  be a  good  basis  for  a
diagnostic  to identify  and track  patients  suffering  from  congestive  heart
failure.   Scios  has  granted  Abbott   Laboratories  and  Biosite  Diagnostics
Incorporated  nonexclusive rights under the Company's BNP patents to develop BNP
diagnostics.  In 1998, Scios and Shionogi & Company,  Ltd.  ("Shionogi") entered
into a  cross-license  of their  respective BNP patent rights for the diagnostic
field. The diagnostic cross-license is royalty free. Shionogi also granted Scios
a   royalty-bearing,   exclusive  license  under  its  BNP  patents  to  develop
therapeutic products.  Shionogi has begun marketing a radioimmunoassay (RIA)-BNP
diagnostic in Japan and Europe.

    CNS Disorders;  Guilford  Pharmaceuticals.  In 1993,  Scios founded Guilford
Pharmaceuticals  Inc.  ("Guilford") to develop  pharmaceutical  products for the
treatment  of diseases of the central  nervous  system  ("CNS").  In its initial
years,  Guilford  operated as a  majority-owned  subsidiary of Scios.  Following
various equity offerings by Guilford,  including its initial public offering and
Scios' subsequent sale of a portion of its holdings,  Scios' ownership  interest
in Guilford was reduced to  approximately  7% as of December 31, 1998.  In March
1999, Scios sold substantially all of its position in Guilford,  reducing Scios'
holding to less than 1% of Guilford's  outstanding  stock.  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.  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 area  licensed to  Guilford.  Scios  thereafter  assigned  its
Biodel(R) license rights back to MIT, which will administer these licenses.  The
Company and MIT are receiving  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.
<PAGE>

    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.
Initial  studies in animal and humans also  suggested  that ANP improved  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 did
not file an NDA for Auriculin(R) by December 31, 1998. These options include (i)
electing to bring a Genentech product for ARF into the Collaboration  Agreement,
(ii) 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 (iii)  terminating the  Collaboration  Agreement.  In February,  1999,
Genentech  notified  Scios that it was  considering  electing  to bring  certain
Genentech  products  into  the  Collaboration   Agreement,   subject  to  Scios'
agreement.  The companies are engaged in ongoing  discussions,  and Genentech is
expected to make its election by the end of April 1999.

    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.  In
1998,  Scios  generated  approximately  $35  million in  revenues  by  marketing
products that were developed by others.

    Third-Party  Products.  The Company has a sales  force of  approximately  98
representatives  who are  employed on a part-time  basis  marketing  psychiatric
products.  The Company  currently  markets in the United States five psychiatric
products  discussed  below under  license from  SmithKline  Beecham  Corporation
("SB") and in mid-1998 began co-promoting two additional products:  Risperdal(R)
(risperidone), the most frequently prescribed antipsychotic under a co-promotion
agreement  with Janssen  Pharmaceutica  and  Paxil(R)  (paroxetine  HCL),  which
participates in both the selective  serotonin  reuptake ("SSRI")  antidepressant
and  antianxiety  markets,  under a  co-promotion  agreement  with SB.  Prior to
entering into the  co-promotion  agreements on  Risperdal(R)  and Paxil(R),  the
Company had agreements to co-promote Haldol(R) Decanoate (haloperidol),  a depot
injection  product to treat  schizophrenia  that was distributed by Ortho-McNeil
Pharmaceutical,  and Effexor(R)  (venlafaxine  HCl), an  antidepressant  that is
marketed by  Wyeth-Ayerst.  The  Haldol(R)  agreement  was  terminated by mutual
agreement  in April  1998 when  generic  competition  entered  the  market.  The
Effexor(R) agreement was also terminated by mutual agreement in April 1998.

    Generally,  the various  companies with whom Scios enters into  co-promotion
agreements for psychiatric  products remain  responsible for the manufacture and
distribution  of the  product  and these  companies  generally  indemnify  Scios
against product  liability  claims.  In its current  co-promotion  arrangements,
Scios is compensated at a fixed level for performing  detailing activity for the
product to selected groups of psychiatrists  and other  prescribers,  with Scios
having  the  opportunity  to earn  additional  incentive  compensation  based on
increasing sales of the product over targets  established for the prescribers to
whom Scios details the product.

    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.
<PAGE>

    Risperdal(R),  Paxil(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.  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.

    From  time to time,  the  Company  may seek to  acquire  the right to market
additional or replacement 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 sales and 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 the  Company's  agreement  with  Bayer on
Natrecor(R),  Bayer will promote Natrecor(R) in the United States on its own for
at least the first three years after which  time,  and  assuming  certain  sales
levels have been achieved,  the Company has the option to begin its co-promotion
alongside  Bayer.  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 any or all 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.

    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 or
that it may acquire. 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  Bayer  for the  promotion  of  Natrecor(R)  and 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 to 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.
When entering into  agreements  with partners for the purpose of obtaining sales
and marketing  expertise and services,  the Company incurs the  additional  risk
that the  partner's  level of effort or marketing  approach may differ from that
which the  Company  might  choose if  operating  solely on its own  behalf.  The
Company  has tried to  structure  its  agreements,  particularly  with Bayer and
Wyeth-Ayerst,  to provide for Scios'  participation in the planning of sales and
marketing  strategies  and to align the  interests  of both  parties  to product
success.  However,  changes in priorities or other  circumstances at the partner
company could have an adverse  effect on achieving  potential  levels of product
sales. See "Business -- Product Development Activities and Risks."
<PAGE>

    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
before investing substantially in manufacturing capability. Prior to March 1999,
the Company  produced  only the bulk active  ingredient in Fiblast(R) in its own
facility  and relied on third  parties for the  manufacture  of other  products,
including  Natrecor(R) and the final product form of Fiblast(R).  In March 1999,
the Company announced a restructuring  plan that included closure in 1999 of the
manufacturing  facility where it had manufactured  Fiblast(R).  The decision was
based on a combination of factors  including the low capacity and high operating
cost of the facility  compared to third party  manufacturing  facilities and the
availability  of  third  party  recombinant  protein   manufacturing   capacity.
Therefore,  the Company does not itself 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 utilizing  third-party  facilities
carries with it certain risks, as there can be no assurance that such facilities
can be arranged on commercially  acceptable  terms or that Scios will be able to
meet  manufacturing  quantity and quality  requirements  through the use of such
arrangements.  Scios has in place an  agreement  providing  for  manufacture  of
Natrecor(R) by Biochemie  Gesellschaft  M.B.H. of Austria through 2006. Having a
low-cost   manufacturing   capability  for  Natrecor(R)  and  smoothly  managing
third-party  manufacturers are expected to be keys to  commercializing  this and
other  products  successfully  and on a  timely  basis.  Failure  to do so could
adversely  impact  the  commercial  success of the  product.  See  "Business  --
Competition."

    Janssen  manufactures  Risperdal(R) and SB manufactures  Paxil(R) and 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."

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  58
issued United States patents and 34 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),   VEGF121  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.
<PAGE>

    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(R).  Scios has been issued United  States,  Canadian,  European and
Japanese patents covering the endogenous form of Natrecor(R),  human b-type BNP.
An opposition  proceeding has been filed against Scios' Japanese  patent.  Scios
has also  obtained  from  Shionogi & Co.,  Ltd.,  Tokyo a worldwide  license for
therapeutic uses to certain issued BNP patents that are based on work by Daiichi
Pharmaceutical  Co.,  Ltd.,  Tokyo,  including a patent issued to Daiichi by the
European Patent Office.

    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. On January 12, 1999,  Scios received a
United States patent covering a cysteine mutant of human basic FGF.

    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 Scios' form of recombinant 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.
<PAGE>

    VEGF121.  Vascular  endothelial  growth factor ("VEGF") is a highly specific
mitogen for vascular  endothelial  cells.  Five isoforms of human VEGF ("hVEGF")
are known,  having 121, 145, 165, 189 and 206 amino acids,  respectively.  Scios
believes  it was the first to  identify,  clone and produce by  recombinant  DNA
technology the 121 amino acid form of hVEGF  (hVEGF121).  This form is unique in
that, unlike the other four isoforms,  it does not bind heparin.  Scios owns two
U.S. patents issued in 1993 covering  hVEGF121,  and in 1996 received a European
patent covering this VEGF isoform. Patent applications are pending in Canada and
Japan. Other companies and institutions,  including Genentech, Monsanto, and the
Regents of the  University  of  California,  hold  patents  and  pending  patent
applications claiming various isoforms of hVEGF and certain VEGF variants.

    p38-kinase  Inhibitors.  Scios has filed a series of patent  applications in
the United States covering the classes of p38-kinase inhibitors that the Company
has  identified.  While the classes of small  molecule  compounds  identified by
Scios researchers appear to be unique, the Company is aware that other companies
are also working to develop p38-kinase  inhibitor  compounds,  have filed patent
applications  on and received  patents  covering  the classes of compounds  that
these  competing  companies  have  developed.  Among the companies  competing to
develop p38-kinase  inhibitors are SmithKline Beecham  Corporation,  G.D. Searle
Pharmaceuticals,  a division of Monsanto Company,  Johnson & Johnson Company and
Merck, Inc., each of whom has substantial resources.

    Trademarks.   Natrecor(R),   Fiblast(R)  and  Auriculin(R),  are  registered
trademarks  of  Scios.  Paxil(R),  Eskalith(R),  Eskalith  CR(R),  Thorazine(R),
Stelazine(R) and Parnate(R) are registered trademarks of SB. Risperdal(R) is the
registered  trademark  of  Janssen.  Haldol(R)  is  a  registered  trademark  of
Ortho-McNeil  Pharmaceutical,  Inc.  Effexor(R)  is a  registered  trademark  of
American Home Products Inc. Gliadel(R) is the registered  trademark of Guilford.
Approval of the generic  compound name used with  Natrecor(R) -- (nesiritide) --
is pending before USAN.

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

    Competition is intense in the development of pharmaceutical  products. 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  clinically  accepted  for the  short-term
management of CHF. Hence, the Company will need to demonstrate positive low cost
clinical  benefits  compared to the existing products 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 and alternative treatments.

    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,  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 expend substantial resources 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 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.  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
foreign and United States 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 and manufacturing  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, the Resource  Conservation  and Recovery Act,  national
restrictions on technology transfer, import, export and customs regulations, and
other present and possible future foreign, 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, but it cannot ensure their  compliance.  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

<PAGE>

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.

Employees
---------

    The Company had 274  full-time  employees  as of December 31, 1998 (of which
221  were  engaged  in  research,  product  and  clinical  development)  and 103
part-time  employees  (primarily  its  sales  force).  As part of  restructuring
certain of its operations, in March 1999, the Company announced staff reductions
aggregating 80 positions that will occur over 4 months ending June 1999.

Item 2.  PROPERTIES

    The Company's current  headquarters  facility in Mountain View,  California,
consists  of three  buildings  owned by the Company  and land  occupied  under a
long-term  ground lease.  In March 1999, the Company  announced its plan to sell
its Mountain  View facility and  consolidate  its  operations in smaller  leased
facilities  in Sunnyvale,  California.  The Company has entered into a letter of
intent  with a  purchaser  for the  Mountain  View  property.  The move from the
Mountain  View  facility is expected to be completed  in August 1999.  The three
buildings in the Mountain View facility  represent  98,000 square feet of office
and laboratory  space.  During 1998, the Company occupied  approximately  88,000
square  feet and leased  the  remaining  space to a tenant.  The  Mountain  View
facility  includes  a  13,000  square  foot  combination   process  and  product
development and biological  testing facility in which Scios previously  produced
bulk supplies of Fiblast(R).

    In 1995,  the  Company  began  leasing  a 52,000  square  foot  building  in
Sunnyvale, California, and constructed research laboratories in a portion of the
space.  The Company  relocated  its  discovery  research  group to the Sunnyvale
facility  in  September  1996.  The  Company's  annual  lease  payments  for the
Sunnyvale research and development facility are approximately $762,000. In 1999,
the Company  will build out the  remaining  space in the  Sunnyvale  facility to
consolidate  all of its research and  development  laboratories in one building.
The Company is also in the process of leasing a  neighboring  33,400 square foot
office  building  to  house  certain  of its  employees.  The  Company  expended
approximately  $2.5  million in  capital  expenditures  in 1998 and  anticipates
spending approximately $5.0 million in capital expenditures in 1999.

    The Company also owns a 57,428  square foot  administrative  and  laboratory
building in Baltimore,  Maryland (the "Holabird  Facility")  originally  used by
Nova   Pharmaceuticals   Corporation,   which  the  Company  acquired  in  1992.
Approximately  two-thirds 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  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.  An agreement  has been
reached between the EPA and parties whose waste was disposed of at the site. The
Company believes that its exposure for clean-up 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, 1999 are
as follows:
<TABLE>
<CAPTION>

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

Richard B. Brewer               47        President and 
                                          Chief Executive Officer

Jack Cohen, Ph.D.               62        Vice President, Quality
                                          & Regulatory

Thomas L. Feldman               48        Vice President of Commercial
                                          Operations

Elliott B. Grossbard, M.D.      51        Senior Vice President of
                                          Development

David W. Gryska                 42        Vice President of Finance
                                          and Chief Financial Officer

John A. Lewicki, Ph.D.          47        Vice President of Research

John H. Newman                  48        Senior Vice President, General
                                          Counsel and Secretary
</TABLE>


    Mr. Brewer is President and Chief Executive Officer of Scios Inc.  He joined
Scios in September 1998 and has served as a Director since that time. From early
1996 to 1998, he was with Heartport Inc., first as Executive Vice President of 
Operations and then, Chief Operating Officer.  Prior to that, Mr. Brewer served 
in various capacities with Genentech, Inc. from 1984 to 1995, most recently as 
Senior Vice President, U.S. Sales and Marketing, Genentech Europe Ltd., and 
Genentech Canada, Inc.  Mr. Brewer earned a B.S. from Virginia Polytechnic
Institute and a M.B.A. from Northwestern University.

    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.

    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.  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. Gryska  joined  Scios in December 1998 as Vice President of Finance and 
Chief Financial Officer.  Prior to joining Scios, Mr. Gryska was Vice President,
Finance and Chief Financial  Officer of Cardiac Pathways Corporation since 1993.
Mr. Gryska was with  Ernst &  Young  LLP from  1982 to September 1993, and as a 
partner since 1989.
<PAGE>

    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.

    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.


                                     PART II

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

    The Company's  Common Stock is traded on the Nasdaq  National  Market System
under the symbol SCIO.  The table below sets forth the high and low sales prices
as reported  by Nasdaq for the Common  Stock  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, 1998, there
were approximately 4,871 stockholders of record of the Company's Common Stock.

<TABLE>
<CAPTION>

                                     Common Stock 

                       FY 1998                            FY 1997
                       -------                            -------

                  High         Low                   High         Low
                  ----         ---                   ----         ---
      <S>         <C>          <C>                   <C>          <C>
      Q1         13-5/8        8-1/8                 8-3/4        5-3/8
      Q2         13-1/4        8                     7            3-5/8
      Q3         9-1/8         4-1/8                 9-7/8        5-7/8
      Q4         10-13/16      3-1/2                 10-5/8       6-7/8
      Year       13-5/8        3-1/2                 10-5/8       3-5/8
</TABLE>


<PAGE>

Item 6.  SELECTED FINANCIAL DATA
<TABLE>

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

Year Ended December 31,          1998          1997           1996           1995           1994
                                 ----          ----           ----           ----           ----
<S>                              <C>           <C>            <C>            <C>            <C>

Revenues                         $ 73,715      $ 47,429       $ 64,223       $ 49,187       $ 53,667
Loss from operations              (11,991)      (39,737)      (22,020)       (28,175)        (31,719)
Other income                       11,122         2,254         4,497          5,049           4,045
Net loss                           (2,363)      (38,667)      (18,403)       (26,382)        (27,961)
Net loss per common share and
 per common share assuming
 dilution                          (0.06)        (1.07)        (0.51)         (0.74)          (0.79)
Cash and securities                97,311        64,700        62,170         87,069         104,439
Working capital                     8,103         4,524        (5,838)        11,642          38,942
Total assets                      138,829       116,871       113,961        131,550         146,096
Long-term obligations              34,593        31,919           426          1,082           1,739
Stockholders' equity               74,926        60,142        93,628        109,394         126,438
Employees at year end                 279           258           256            216             202
Field sales representatives            98            92            79             85              81
</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   and  future   results  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,  and
those discussed in the Company's Form 10-K for the year ended December 31, 1998.

Operating Results (1998, 1997 and 1996)
-----------------
    Total revenues for the Company were $73.7 million in 1998,  $47.4 million in
1997 and  $64.2  million  in 1996.  The  revenue  decline  from 1996 to 1997 and
increase  from  1997 to 1998 was  principally  due to  changes  in the  level of
research and development contract revenues.

    Revenue from product sales of certain  psychiatric  products ("SB Products")
under license from  SmithKline  Beecham  Corporation  ("SB") was $29.1  million,
$35.2 million and $38.2 million in 1998,  1997 and 1996,  respectively.  Product
sales declined 17% from 1997 to 1998 and 8% from 1996 to 1997 due to competition
from generic drugs and new competing products.

    Co-promotion commissions were $6.5 million, $5.8 million and $6.5 million in
1998, 1997 and 1996,  respectively.  In 1998, 1997 and 1996 the Company received
co-promotion  commissions  under  agreements  with  Ortho-McNeil  Pharmaceutical
("Ortho-McNeil"), an affiliate of Johnson & Johnson, for the co-promotion of the
psychiatric  product  Haldol(R)  Decanoate  (haloperidol)  ("Haldol")  and  with
Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), a division of American Home Products
Corp., for the co-promotion of its psychiatric  product Effexor(R)  (venlafaxine
hydrochloride)  ("Effexor").  In April  1998,  the  respective  agreements  with
Ortho-McNeil and  Wyeth-Ayerst to co-promote  Haldol and Effexor were terminated
by mutual agreement. In 1998, the Company also received co-promotion commissions
under  new  agreements  with  SB  for  the  co-promotion  of its  drug  Paxil(R)
(paroxetine  HCl) ("Paxil") for the treatment of depression,  panic disorder and
obsessive-compulsive  disorder and with Janssen  Pharmaceutica Inc.  ("Janssen")
for  the  co-promotion  of its  anti-psychotic  drug  Risperdal(R)  (risperdone)
("Risperdal").  Co-promotion  commissions increased from 1997 to 1998 due to the
change in product mix and decreased from 1996 to 1997 as a result of lower sales
of Haldol.
<PAGE>

    Revenue from research and  development  contracts was $38.1 million in 1998,
$6.4  million in 1997 and $19.5  million in 1996.  The  increase in revenue from
1997 to 1998 was primarily due to: receipt of a $20.0 million payment from Bayer
AG   ("Bayer")   on   entering   a   worldwide   strategic   alliance   for  the
commercialization of Natrecor(R)  (nesiritide)  ("Natrecor") and $4.5 million in
additional  development  funding;  milestone  payments of $5.0 million from Novo
Nordisk A/S for development of insulinotropin;  and additional  contract funding
from Eli Lilly and  Company  ("Eli  Lilly") and DuPont  Pharmaceuticals  Company
("DuPont")  for the  Company's  Alzheimer's  research  program.  The decrease in
revenue  from 1996 to 1997 was  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.  Revenues from Bayer and Novo Nordisk A/S accounted for
64% and 13% of contract revenues in 1998.  Revenues under collaboration with Eli
Lilly to study Alzheimer's disease comprised 8% of 1998 and 28% of 1997 contract
revenues.  In 1996,  the payment from  Wyeth-Ayerst  accounted  for 62% of total
research and development contract revenue.  Revenues from the collaboration with
Hoechst Marion Roussel to study Alzheimer's disease comprised  approximately 3%,
16% and 8% of  contract  revenues  in 1998,  1997 and  1996,  respectively.  The
collaboration  was  terminated by mutual  agreement in 1997.  Revenues under the
collaboration with Kaken  Pharmaceutical  Co., Ltd. ("Kaken") to develop Fiblast
in Japan for the  treatment  of dermal  ulcers,  were 2%, 3% and 9% of  contract
revenues in 1998, 1997 and 1996, respectively.

    Cost of goods sold for the SB Products were $16.6 million, $20.2 million and
$22.3 million in 1998,  1997 and 1996,  respectively.  The declines from year to
year were principally the result of lower unit sales.  Gross margins were 43% in
1998 and 1997 compared to 42% in 1996.  Future  changes in gross margins will be
principally  dependent  on the effects of price  increases,  competition  in the
marketplace and changes in the product mix.

    Research and development  expenses were $46.6 million in 1998, $41.9 million
in 1997 and $39.4 million in 1996. The increases year to year were the result of
higher  staffing  levels,  greater  expenses  for the purchase of drug supply to
support  further  development  of the  Company's  lead  products,  and increased
clinical trials expenses.

    Marketing,  general and administrative  expenses were $19.4 million in 1998,
$20.7  million in 1997 and $19.7 million in 1996.  The  decreased  spending from
1997 to 1998 was  primarily  due to lower  depreciation  expenses.  The spending
increase from 1996 to 1997 was principally due to higher staffing levels.

    The profit distributions to third parties of $3.1 million,  $4.4 million and
$4.8 million in 1998, 1997 and 1996,  respectively,  represent 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 $11.1  million  in 1998,  $2.3  million  in 1997 and $4.5
million in 1996.  The increase from 1997 to 1998 was due to the gain on the sale
of the Company's entire interest in its subsidiary Karo Bio AB, 70,000 shares of
the  common  stock of  Guilford  Pharmaceuticals  Inc.  ("Guilford"),  and other
marketable securities in the Company's portfolio. 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 $30.0 million loan from  Genentech that was
drawn down in March 1997.

    The $1.3  million net loss in equity of  affiliate in both 1997 and 1998 was
the result of Guilford's 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,  1998 as a result of  Guilford's  public
stock  offerings and the sales of Guilford  stock by the Company.  In the fourth
quarter of 1998, the Company reclassified the Company's investment in Guilford's
stock  to  marketable  securities.  From  June of 1994,  the date of  Guilford's
initial  public stock  offering,  until the fourth  quarter of 1998, the Company
used the equity method of accounting  for its  investment in Guilford.  Prior to
the public stock offering,  the financial  results of Guilford were consolidated
with those of the  Company.  The minority  interest of ($0.02)  million in 1998,
$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  sustainable  profitability  depends
principally  upon the  success of the  Company  and its  collaboration  partner,
Bayer,  in achieving  regulatory  approvals and generating  sales from Natrecor.
Under the  Natrecor  strategic  alliance,  Bayer is solely  responsible  for the
marketing  and sales  effort in the United  States for at least the first  three
years after product launch.  While the Company expects Bayer will be diligent in
its sales and  marketing  efforts,  and has secured an option to  terminate  the
agreement if certain minimum sales activity levels are not achieved, the Company
cannot  require  Bayer to take actions the Company  might take itself if it were
promoting the product solely on its own.

    Profitability  will  also  depend  on  the  Company's  ability  to  generate
additional  revenues through the development and  commercialization  of products
such as Fiblast and vascular  endothelial growth factor 121 ("VEGF121"),  either
through its own efforts or in collaboration  with partners.  The Company expects
to  continue  to  generate  revenue  from  the  sale  and  co-promotion  of  the
psychiatric  drugs it  currently  sells or of other third party  product  rights
which it may acquire as additions to or replacements for existing  products.  In
addition,  the Company  expects to continue to rely on outside  partners to fund
certain research  activities such as its ongoing  Alzheimer's  research program.
Such funding will depend, in part, on 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.

    As a result of  closing  down its  manufacturing  facility,  the  Company is
wholly  dependent on third party  suppliers for the manufacture of drug for sale
and  is  evaluating   additional  supply  sources  for  its  other  products  in
development. Before closing its manufacturing facility, the Company will produce
all of the Fiblast drug supply  necessary to fulfill its  contractual  agreement
with Kaken.  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.
Profitability may also be affected by any gains realized on the sale of all or a
portion  of the  Company's  equity  holding  in  Guilford  and by any  merger or
acquisition  activity undertaken by the Company to expand its portfolio of drugs
in development.

    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  Fiblast  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 Risperdal and Paxil that are currently being co-promoted. Factors influencing
the  availability  of  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.

    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.
<PAGE>

Restructuring
-------------

    On March 1, 1999, the Company  announced a  restructuring  and  right-sizing
plan  that  includes   reduction  of  the  Company's   full-time   workforce  by
approximately  30% and the  consolidation of its  headquarters,  development and
research staff into currently leased facilities in Sunnyvale, California. In the
first half of 1999, the Company will close its manufacturing facility due to its
low capacity and high  operating  expenses and the ready  availability  of third
party recombinant protein manufacturing  capacity.  The Company's Mountain View,
California,  campus  will be sold.  The  consolidation  is  expected  to  create
improved  management  and  operational  synergies and save  approximately  $14.0
million annually.  In the quarter ending March 31, 1999, the Company will record
a  one-time   restructuring   charge  of  approximately  $7.0  million  for  the
disposition of certain excess assets and severance costs.

Year 2000 Computer Systems Compliance
-------------------------------------

    Many older computer  software programs refer to years only in terms of their
final two digits.  Such  programs may  interpret  the year 2000 to mean the year
1900. If not  corrected,  those programs  could cause  date-related  transaction
failures.  The Company has developed  plans to address the  potential  exposures
related to the impact on its  computer  systems for the year 2000 and beyond.  A
project team,  consisting of Company personnel,  is continuing its assessment of
key  internal  computer  systems and is  developing  and  implementing  plans to
correct the problems.  The Company  expects the assessment,  implementation  and
testing to be  successfully  completed  during 1999 and believes that with these
plans, the Year 2000 issue will not pose  significant  problems for its computer
systems or ongoing  operations.  However,  if such modifications and conversions
are not made,  or are not  completed in a timely  fashion,  the Company does not
expect the Year 2000 issue to have a material impact on its operations.

    In addition to risks associated with the Company's own computer systems, the
Company has  relationships  with, and is dependent upon, a large number of third
parties that  provide  information,  goods and  services to the  Company.  These
include  financial  institutions,  suppliers,  vendors,  research  partners  and
governmental entities. If significant third parties experience failures in their
computer systems due to Year 2000  noncompliance,  it could affect the Company's
ability to process transactions or engage in similar normal business activities.
While some of these risks are outside  the control of the  Company,  the Company
has  instituted a program to identify key third  parties,  update  contracts and
address any noncompliance issues.

    As the  Company's  plan is to address  its Year 2000  issues  prior to being
affected  by  them,  it has not  developed  a  comprehensive  contingency  plan.
However,  if the Company  identifies  significant risks related to its Year 2000
compliance or its progress deviates from the anticipated  timeline,  the Company
will develop contingency plans as deemed necessary at that time.

    The total  cost of the Year 2000  systems  assessments  and  conversions  is
funded through  operating cash flows,  and the Company is expensing these costs.
The  financial  impact of making the  required  system  changes  cannot be known
precisely  at this time but is not  expected  to be  material  to the  Company's
financial position, results of operations or cash flows.

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

    Combined cash, cash equivalents and marketable  securities (both current and
non-current)  totaled  $97.3  million at December 31, 1998, an increase of $32.6
million  from  December  31,  1997.  The  increase  was mainly  attributable  to
favorable operating cashflows,  stock option exercises, and the reclassification
of the  investment in Guilford to  marketable  securities.  The  increases  were
partially  offset by $2.5 million used for property and equipment  purchases and
$1.5 million used in repurchases of the Company's stock in the public market.

    In  October  1998 the  Company  announced  that its Board of  Directors  had
authorized  an  additional  expenditure  of $5.0 million for the  repurchase  of
shares of the  Company's  common  stock.  In  November  1995,  the  Company  had
authorized the expenditure of up to $6.0 million for the repurchase of shares of
the Company's common stock. The Company  purchased 327,000 treasury stock shares
for $1.5  million in 1998 and  352,500  shares for $1.8  million in 1997.  As of
December 31, 1998,  the Company had purchased  1,356,500  shares at an aggregate
price of $6.3 million under the repurchase program since its inception in 1995.
<PAGE>

    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  $97.3  million at December 31, 1998,  together with revenues from
product sales, royalties,  collaborative agreements and interest income, will be
used to fund  new and  continuing  research  and  development  programs,  expand
clinical  trials  for its  products  under  development  and for  other  general
purposes. The Company believes its cash resources will be sufficient to meet its
capital  requirements  for the next several years.  Key factors that 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  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.

Financial Risk Management
-------------------------

    The Company is exposed to a variety of risks,  including changes in interest
rates affecting the return on its investments and foreign currency fluctuations.
In the normal course of business,  the Company employs established  policies and
procedures to manage its exposures to fluctuations in interest rates and foreign
currency values.

    The Company's  exposure to  market-rate  risk for changes in interest  rates
relates primarily to the Company's investment portfolio.  The Company places its
investment with high quality issuers and, by policy, limits the amount of credit
exposure to any one issuer and does not use derivative financial  instruments in
its  investment  portfolio.  The Company  maintains an  investment  portfolio of
various issuers, types and maturities,  which consist of both fixed and variable
rate    financial    instruments.    These    securities   are   classified   as
available-for-sale and, consequently,  are recorded on the balance sheet at fair
value  with  unrealized  gains or losses  reported  as a separate  component  in
stockholders'  equity,  net of  applicable  taxes.  At any time sharp changes in
interest  rates can affect the fair value of the  investment  portfolio  and its
interest  earnings.  Currently  the Company does not hedge these  interest  rate
exposures.

    The Company's exposure to foreign currency fluctuations is currently limited
to its supply  contract for  Natrecor,  which is  denominated  in German  marks.
Changes in the  exchange  rate between  German  marks and the U.S.  dollar could
adversely affect the Company's  manufacturing  costs. All of the Company's other
contracts are denominated in U.S. dollars. Exposure to foreign currency exchange
rate  risk may  change  over  time as the  business  evolves  and the  Company's
products are introduced into international markets.  Currently, the Company does
not  hedge  against  any  foreign  currencies  and,  as a  result,  could  incur
unanticipated gains or losses.

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

    In June 1998, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities"  ("SFAS 133").  SFAS 133  establishes  new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 will be  effective  for fiscal  years  beginning  after June 15,  1999.  The
Company does not  currently  hold  derivative  instruments  or engage in hedging
activities.
<PAGE>

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

    None.



<PAGE>



                                    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  1999  Annual  Meeting  of
Stockholders.

    Identification of Executive Officers.  See page17 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 1999 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 1999 Annual Meeting of Stockholders.

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 1999 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 at page F-1 
          of this Form 10-K.

     (2)  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.

     (3)  Exhibits.  See Exhibit Index at page 25 of this Form 10-K.

(b)  Reports on Form 8-K.  Form 8-K filed October 27, 1998 respecting the
     appointment of Richard B. Brewer as President and Chief Executive Officer 
     of the Company.





<PAGE>




                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
       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

       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

       10.27      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

       10.32      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
<PAGE>

       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

       10.38*     Employment Letter dated September 8, 1998 between the Registrant and
                  Richard B. Brewer

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

       23.1       Consent of PricewaterhouseCoopers LLP.

       24.1       Powers of Attorney. Reference is made to page 28.
-------------------
<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.

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.

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.
<PAGE>

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 26, 1999              By: /s/ Richard B. Brewer              
                                         ---------------------------------------
                                         Richard B. Brewer
                                         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 B. Brewer 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 B. Brewer                         President and Chief Executive Officer            March 26, 1999
  -----------------------------                 (Principal Executive Officer)
  Richard B. Brewer

  /s/ David W. Gryska                           Chief Financial Officer                          March 26, 1999
  -----------------------------                 (Principal Accounting Officer)
  David W. Gryska

  /s/ Donald B. Rice, Ph.D.                     Chairman of the Board                            March 26, 1999
  -----------------------------
  Donald B. Rice, Ph.D.

  /s/ Samuel H. Armacost                        Director                                         March 26, 1999
  -----------------------------
  Samuel H. Armacost

  /s/ Myron Du Bain                             Director                                         March 26, 1999
  -----------------------------
  Myron Du Bain

  /s/ Charles A. Sanders                        Director                                         March 26, 1999
  -----------------------------
  Charles A. Sanders

  /s/ Robert W. Schrier, MD                     Director                                         March 26, 1999
  -----------------------------
  Robert W. Schrier, MD

  /s/ Burton E. Sobel, MD                       Director                                         March 26, 1999
  -----------------------------
  Burton E. Sobel, MD

  /s/ Solomon H. Snyder, MD                     Director                                         March 26, 1999
  -----------------------------
  Solomon H. Snyder, MD

  /s/ Eugene L. Step                            Director                                         March 26, 1999
  -----------------------------
  Eugene L. Step
</TABLE>

<PAGE>



                          INDEX TO FINANCIAL STATEMENTS



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

  Consolidated Balance Sheets at December 31, 1998 and
    December 31, 1997......................................................F-3

  Consolidated Statements of Operations for the years ended
    December 31, 1998, 1997 and 1996.......................................F-4

  Consolidated Statements of Cash Flows for the years ended
    December 31, 1998, 1997 and 1996.......................................F-5

  Consolidated Statements of Stockholders' Equity for the
    years ended December 31, 1998, 1997 and 1996...........................F-6

  Notes to the 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.:

       In our opinion,  the  accompanying  consolidated  balance  sheets and the
       related  consolidated  statements of operations and statements of changes
       in stockholders' equity and of cash flows present fairly, in all material
       respects,  the financial  position of Scios Inc. and it  subsidiaries  at
       December 31, 1998 and 1997, and the results of their operations and their
       cash flows for each of the three years in the period  ended  December 31,
       1998 in conformity with generally accepted accounting  principles.  These
       financial statements are the responsibility of the Company's  management;
       our   responsibility  is  to  express  an  opinion  on  theses  financial
       statements  based  on our  audits.  We  conducted  our  audits  of  these
       statements in accordance with generally accepted auditing standards which
       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,
       assessing the accounting  principles used and significant  estimates made
       by   management,   and  evaluating   the  overall   financial   statement
       presentation.  We believe that our audits provide a reasonable  basis for
       the opinion expressed above.




       PricewaterhouseCoopers LLP
       San Jose, California
       January  30,  1999
            (Except for note 17, as to which the
            date is March 1, 1999.)





                                      F-2
<PAGE>




                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
    December 31,                                                                1998                 1997
    (In thousands, except share data)                                           ----                 ----
    <S>                                                                         <C>                  <C>
    Assets
    Current assets:
         Cash and cash equivalents                                                $6,683              $10,197
         Marketable securities                                                    23,394               13,322
         Accounts receivable                                                       6,768                5,215
         Prepaid expenses                                                            568                  600
                                                                                --------             --------
           Total current assets                                                   37,413               29,334

    Marketable securities, non-current                                            67,234               41,181
    Investment in affiliate                                                           --               10,537
    Property and equipment, net                                                   32,214               33,583
    Other assets                                                                   1,968                2,236
                                                                                --------             --------
             Total Assets                                                       $138,829             $116,871
                                                                                ========             ========
    Liabilities And Stockholders' Equity
    Current liabilities:
         Accounts payable                                                         $2,327              $1,685
         Other accrued liabilities                                                10,087              11,134
         Deferred contract revenue                                                16,896              11,652
         Current portion of long-term debt                                            --                 339
                                                                                --------             -------
           Total current liabilities                                              29,310              24,810
    Long-term debt                                                                34,573              31,919
    Minority interests                                                                20                  --
                                                                                --------             -------
           Total liabilities                                                      63,903              56,729

    Commitments and contingencies (Notes 9, 10 and 11)
    Stockholders' equity:
         Preferred stock; $.001 par value; 20,000,000
           shares authorized; none issued and outstanding                             --                  --
         Common stock; $.001 par value; 150,000,000
           shares authorized; issued and outstanding
           38,468,652 and 38,032,120, respectively                                    38                  38
         Additional paid-in capital                                              416,428             411,045
         Treasury stock; 754,199 and 1,029,500
           shares, respectively                                                   (3,481)             (4,758)
         Notes receivable from stockholders                                         (145)                (13)
         Deferred compensation, net                                                 (505)                 --
         Accumulated other comprehensive income                                   11,412                 288
         Accumulated deficit                                                    (348,821)           (346,458)
                                                                                --------            --------
           Total stockholders' equity                                             74,926              60,142
                                                                                --------            --------
             Total Liabilities And Stockholders' Equity                         $138,829            $116,871
                                                                                ========            ========

</TABLE>


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

                                      F-3
<PAGE>



                      CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
  (In thousands, except share data)
  Year Ended December 31,
                                                                        1998                 1997                1996
                                                                        ----                 ----                ----
  <S>                                                                   <C>                  <C>                 <C>
  Revenues:
      Product sales                                                       $29,101              $35,193             $38,189
      Co-promotion commissions                                              6,513                5,822               6,503
      Research & development contracts                                     38,101                6,414              19,531
                                                                        ---------            ---------           ---------
                                                                           73,715               47,429              64,223
                                                                        ---------            ---------           ---------
  Costs and expenses:
      Cost of goods sold                                                   16,606               20,179              22,313
      Research and development                                             46,637               41,907              39,424
      Marketing, general and administration                                19,407               20,720              19,746
      Profit distribution to third parties                                  3,056                4,360               4,760
                                                                        ---------            ---------           ---------
                                                                           85,706               87,166              86,243
                                                                        ---------            ---------           ---------
  Loss from operations                                                    (11,991)             (39,737)            (22,020)
  Other income (expense):
      Investment income                                                     4,154                3,966               6,361
      Interest expense                                                     (2,685)              (2,229)               (419)
      Realized gains on securities                                          9,003                   --                  --
      Other income (expense)                                                  650                  517              (1,445)
                                                                        ---------            ---------           ---------
                                                                           11,122                2,254               4,497
                                                                        ---------            ---------           ---------
  Equity in net income (loss) of affiliate                                 (1,343)              (1,261)                274
  Minority interests                                                          (20)                  77              (1,121)
                                                                        ---------            ---------           ---------
  Loss before provision for income taxes                                   (2,232)             (38,667)            (18,370)
  Provision for income taxes                                                 (131)                  --                 (33)
      Net Loss                                                             (2,363)             (38,667)            (18,403)
                                                                        =========            =========           =========
  Other comprehensive income (loss):
      Unrealized gains (losses) on securities                              11,124                  358                (648)
  Comprehensive income (loss)                                              $8,761             ($38,309)           ($19,051)
      Loss per common share:
           Basic and diluted                                               ($0.06)              ($1.07)             ($0.51)
           Weighted average number of
             common shares outstanding
             used in calculation of:
           Basic and diluted                                           37,694,358           36,105,797          35,885,922

</TABLE>


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


                                      F-4
<PAGE>



                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
   Year ended December 31,
   (In thousands)
                                                                        1998                 1997                1996
                                                                        ----                 ----                ----
   <S>                                                                  <C>                  <C>                 <C>
   Cash flows from operating activities:
      Net loss                                                            ($2,363)           ($38,667)           ($18,403)
      Adjustments to reconcile net loss to net
      cash provided by (used in) operating activities:
         Depreciation and amortization                                      3,845               5,740               5,330
         Accrued long-term interest payable                                 2,577               1,919                  --
         Loss on sale of assets                                                --                  --              (2,620)
         Equity in net (income) loss of affiliate                           1,343               1,261                (274)
         Minority interests                                                    97                 (77)              1,121
         Recognition of deferred compensation                                  92                  --                  --
         Change in assets and liabilities:
           Accounts receivable                                             (1,553)               (407)             (1,794)
           Accounts payable                                                   642                (822)             (2,315)
           Other accrued liabilities                                       (1,047)              1,123               2,148
           Other                                                              168                 370                (206)
           Deferred contract revenue                                        5,244               7,986              (2,109)
                                                                          -------             -------             -------
                Net cash provided by (used in) operating activities         9,045             (21,574)            (19,122)
                                                                          =======             =======             =======

   Cash flows from investing activities:
      Purchases of property and equipment                                  (2,476)             (2,490)             (6,682)
      Proceeds from sale of investment in affiliate                           459                  90               3,600
      Proceeds from sale of assets                                             --                   6                  44
      Sales/maturities of marketable securities                           260,388             264,745             219,027
      Purchases of marketable securities                                 (276,654)           (258,307)           (196,036)
                                                                          -------             -------             -------
                Net cash provided by (used in) investing activities       (18,283)              4,044              19,953
                                                                          =======             =======             =======

   Cash flows from financing activities:
      Issuance of common stock and collection of notes
         receivable from stockholders, net                                  7,572               1,641                 601
      Purchase of treasury stock                                           (1,509)             (1,767)             (2,024)
      Payment of notes payable                                               (339)             (3,734)               (668)
      Proceeds from notes payable                                             ---              30,000                  --
                                                                          -------             -------             -------
                Net cash provided by (used in) financing activities         5,724              26,140              (2,091)
                                                                          =======             =======             =======

   Net increase (decrease) in cash and cash equivalents                    (3,514)              8,610              (1,260)
   Cash and cash equivalents at beginning of year                          10,197               1,587               2,847
                                                                          -------             -------             -------
   Cash and cash equivalents at end of year                               $ 6,683             $10,197             $ 1,587
                                                                          =======             =======             =======

   Supplemental cash flow data:
      Cash paid during the year for interest                                  $21                $309                $419
   Supplemental disclosure of non-cash investing
      and financing:
      Change in net unrealized gains(losses) on securities               $ 11,124                $358               ($648)
      Investment in affiliate                                             $ 1,343              $4,949              $4,708
   Write-off of fully depreciated assets                                    $ 143                $ 39               $ 158
</TABLE>

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

                                      F-5
<PAGE>

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                      Accumu-
                                                                                                      lated
                                                                   Pre-           Notes               Other
                                               Common              ferred         Receivable  Def-    Compre-
                                    Common     Stock   Additional  Stock  Treas-  From        erred   hensive   Accu-
(in thousands, except    Preferred  Stock      Par     Paid-In     Par    ury     Stock       Compen- Income    mulated
share data)              Shares     Shares     Value   Capital     Value  Stock   holders     sation  (Loss)    Deficit    Total
---------------------    ---------  ---------- ------  ----------  ------ -----   ----------  ------  -------   -------    -----
<S>                      <C>        <C>        <C>     <C>         <C>    <C>     <C>         <C>     <C>       <C>        <C>
Balances at 
  December 31, 1995       16,053    36,009,055 $36     $399,155    $--    ($967)   ($20)      $--        $578   ($289,388) $109,394

Conversion of preferred   (3,421)      342,100   1           (1)                                                                 --
Purchase of treasury                                                     (2,024)                                             (2,024)
stock
Options exercised                      155,142              594                                                                 594
Notes receivable from                                                                 7                                           7
stockholders
Changes in unrealized                                                                                    (648)                 (648)
losses on
available-for-sale
securities
Investment in Guilford                                    4,708                                                               4,708
Net loss                                                                                                          (18,403)  (18,403)

                         ---------  ---------- ------  ---------   ------  -----   ----------  ------  -------    --------   -------
Balances at 
  December 31, 1996       12,632    36,506,297  37      404,456     --    (2,991)   (13)       --         (70)   (307,791)   93,628

Conversion of preferred  (12,632)    1,263,200   1           (1)                                                                 --
Purchase of treasury                                                      (1,767)                                            (1,767)
stock
Options exercised                      262,621            1,641                                                               1,641
Stock issued for services                    2                                                                                   --
Notes receivable from                                                                                                            --
stockholders
Changes in unrealized                                                                                     358                   358
gains on
available-for-sale
securities
Investment in Guilford                                    4,949                                                               4,949
Net loss                                                                                                          (38,667)  (38,667)

                         ---------  ----------  ------  ---------  ------  -----   ----------  ------  -------   -------     -------
Balances at
  December 31, 1997            --   38,032,120   38     411,045     --    (4,758)   (13)       --         288    (346,458)   60,142

Common stock issued                    262,283            3,048                                                               3,048
Purchase of treasury                                                      (1,509)                                            (1,509)
stock
Options exercised                      677,249            4,524                                                               4,524
Treasury stock reissued               (603,000)          (2,786)           2,786                                                 --
Notes receivable from                                                              (132)                                       (132)
stockholders
Deferred compensation                  100,000              597                                (597)                             --
Amortization of deferred                                                                         92                              92
compensation
Changes in unrealized                                                                                  11,124                11,124
gains on
available-for-sale
securities
Investment in Guilford                                                                                                           --
Net loss                                                                                                           (2,363)   (2,363)

                         ---------  ----------  ------  ---------  ------ -----   ----------  -----   -------   ---------    -------
Balances at 
  December 31, 1998             --  38,468,652  $38     $416,428   $--   ($3,481) ($145)      ($505)  $11,412   ($348,821)  $74,926
1998
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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



                                      F-6
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 1.     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,  inflammatory  conditions
          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.  The Company's commercial
          operations division  also  markets seven  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  fiscal
          1999.

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

          Principles of consolidation

          The  consolidated  financial  statements  include the  accounts of the
          Company 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  accounted  for  its  7%
          ownership  in Guilford  Pharmaceuticals  Inc.  ("Guilford")  under the
          equity method through September 1998 because it had  representation on
          Guilford's   Board  of  Directors.   In  October  1998,   the  Company
          reclassified its Guilford investment to marketable  securities because
          of a change in the Company's  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 90 days, at the time acquired, to be cash equivalents.  Cash
          equivalents are stated at cost, which approximates market value.

          Marketable securities

          All marketable securities at December 31, 1998 and 1997 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

          Approximately one-third of the Company's revenues in 1998 were derived
          from product sales,  which consist entirely of sales in the U.S. under
          a license agreement with SmithKline Beecham Corp. ("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.

          Approximately  two-thirds  of 1998 research and  development  contract
          revenues  were  from  the  strategic  alliance  for the  marketing  of
          Natrecor(R) (nesiritide) ("Natrecor") with Bayer AG ("Bayer").  Future
          Bayer  revenues  will be dependent on continued  Natrecor  development
          efforts,  success in achieving  regulatory  approvals,  and successful
          commercialization.
                                      F-7
<PAGE>

          In 1998,  Bayer  contributed 33% of the Company's  total revenues.  In
          1997, no individual  customer or partner  contributed more than 10% of
          total revenues. In 1996,  Wyeth-Ayerst  Laboratories  ("Wyeth-Ayerst")
          contributed 21% of total revenues.

          At December 31, 1998, the $6.8 million in accounts receivable included
          $3.3 million from Bayer, $1.0 million from Janssen  Pharmaceutica Inc.
          ("Janssen")  and $2.1 million from SB. 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
          Pharmaceutical  ("Ortho-McNeil"),  $0.9 million from  Wyeth-Ayerst and
          $3.2 million from SB.

          The Company's  excess cash is invested in a  diversified  portfolio of
          securities  consisting  of U.S.  Treasury  Notes,  deposits with major
          banks    and    financial    institutions,     and    investment-grade
          interest-bearing corporate securities issued by companies in a variety
          of  industries.  In addition,  the Company owned  1,367,500  shares of
          Guilford stock that was recorded on December 31, 1998 at fair value as
          an available-for-sale marketable security.

          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.  Upon sale or  retirement  of
          assets, the cost and related accumulated  depreciation or amortization
          are removed from the balance sheet,  and the resulting gain or loss is
          reflected in operations.

          Product sales

          Revenue from product  sales 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 related to sales of the SB Products.

          Co-promotion commissions

          Revenue from co-promotion commissions (see Note 3) is recognized based
          on   estimated   sales  levels  of   Janssen's   psychiatric   product
          Risperdal(R)  (risperdone)  ("Risperdal") and SB's psychiatric product
          Paxil(R)  (paroxetine  HCl)  ("Paxil") 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
          based on sales  to third  parties  are  recognized  as  revenues  upon
          receipt.  Research  and  development  expenses in 1998,  1997 and 1996
          include  approximately  $4.9  million,  $2.1 million and $1.9 million,
          respectively,  incurred in connection  with  programs  subject to cost
          reimbursement, collaborative or other performance agreements.

          Treasury stock

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

          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  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.
                                      F-8
<PAGE>

          Computation of net loss per share

          Effective December 31, 1997, the Company adopted Financial  Accounting
          Standards No. 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 is calculated  using the
          weighted  average  number of common  and  dilutive  common  equivalent
          shares  outstanding  during the  period.  The  outstanding  options to
          purchase common stock were excluded from diluted earnings calculations
          for 1998,  1997, and 1996 because  inclusion of the options would have
          been anti-dilutive.

          Comprehensive income (loss)

          The Company adopted  Statement of Financial  Accounting  Standards No.
          130,  "Accounting  for  Comprehensive  Income," during the fiscal year
          ended 1998.  This  statement  establishes  standards for reporting and
          display of comprehensive  income (loss) and its components  (including
          revenues, expenses, gains and losses) in a full set of general-purpose
          financial  statements.  The Company's  unrealized gains on investments
          represent the only component of comprehensive income, that is excluded
          from net loss for 1998 and prior years.  The  Company's  comprehensive
          income  (loss)  has  been  presented  in  the  consolidated  financial
          statements.  As the Company is in a loss position tax effects have not
          been allocated to the components of other comprehensive income (loss).
          Accumulated other comprehensive  income (loss) balances are as follows
          for the years ended (in thousands):
<TABLE>
<CAPTION>
                                                                   Accumulated
                                               Unrealized          Other
                                               Gains (losses)      Comprehensive
                                               on Securities       Income (loss)
                                               --------------      -------------
          <S>                                  <C>                 <C>

          Balance, December 31, 1996           $   (70)             $   (70)
          Current period change                    358                  358
                                               --------             -------
          Balance, December 31, 1997               288                  288
          Current period change                 11,124               11,124
                                               -------               ------
          Balance, December 31, 1998           $11,412              $11,412
                                               =======              =======
</TABLE>

          Income taxes

          The Company  accounts  for income  taxes under  Statement of Financial
          Accounting  Standard No. 109,  "Accounting  for Income  Taxes,"  which
          prescribes the use of the liability  method whereby deferred tax asset
          or liability account balances are calculated at the balance sheet date
          using  current  tax laws and 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.

          Recent pronouncements

          In June 1998, the Financial Accounting Standards Board ("FASB") issued
          Statement of Financial  Accounting  Standards No. 133, "Accounting for
          Derivative  Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
          establishes  new standards of accounting  and reporting for derivative
          instruments  and hedging  activities.  SFAS 133 will be effective  for
          fiscal  years  beginning  after June 15,  1999.  The Company  does not
          currently hold derivative instruments or engage in hedging activities.
                                      F-9
<PAGE>

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

          a.   Agreement with Bayer AG

          In May 1998, the Company  entered into an agreement with Bayer for the
          worldwide  development and  commercialization  of Natrecor, a new drug
          for the short-term management of congestive heart failure (CHF). Under
          the agreement,  the Company will continue to manage the manufacture of
          Natrecor and Phase IIIb clinical  trials,  with Bayer managing further
          worldwide   development  and   commercialization.   Upon  signing  the
          contract,  the  Company  received a payment of $20.0  million and will
          receive up to $40.0  million in  milestone  payments  upon  regulatory
          approvals  in the  United  States,  Europe and  Japan.  The  agreement
          provides  the Company the option to  participate  in  co-promotion  of
          Natrecor in the U.S.  after three years upon  achievement of specified
          sales levels, and it provides for the Company to actively  participate
          in the further  development  of Natrecor  with  funding  from Bayer at
          specified minimum levels

          b.   Agreement with Janssen Pharmaceutica Inc.

          The Company  entered into a three-year  agreement,  effective in April
          1998, with Janssen to jointly promote the  antipsychotic  Risperdal in
          the United  States.  Under the  agreement,  the Company  receives base
          payments plus  incentive  compensation  on achieving  specified  sales
          levels over a contract  year  beginning  in April and ending in March.
          Janssen manufactures and distributes the product. The agreement may be
          extended by mutual  agreement  for  additional  periods of at least 12
          months each.

          c.   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  U.S.  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.

          In September  1998,  the Company  entered into an agreement with SB to
          co-promote Paxil in the U.S. Paxil, which regulates the brain chemical
          serotonin,  is currently approved to treat depression,  panic disorder
          and  obsessive-compulsive  disorder.  Under the agreement, the Company
          receives  base  payments  plus  incentive  compensation  on  achieving
          specified  sales levels  during a specified  term.  The  companies are
          currently  in  discussions  on  revising  the  incentive  compensation
          structure.

          d.   Agreement with DuPont Pharmaceuticals Company

          In December  1997,  the Company  entered into an agreement with DuPont
          Pharmaceuticals    Company   ("DuPont")    establishing   a   research
          collaboration  in the  area of  Alzheimer's  disease  with the goal of
          developing  pharmaceuticals that prevent or retard the disease.  Under
          the terms of the  agreement,  DuPont will fund research at the Company
          and will have  responsibility  to develop and  commercialize  products
          from this  collaboration.  DuPont also  purchased  $3.0 million of the
          Company's  common  stock in 1998 and will make  milestone  and royalty
          payments to the Company as products advance through development.

          e.   Agreement with Eli Lilly and Company

          In May 1997, the Company  entered into a research  collaboration  with
          Eli Lilly and Company  ("Eli Lilly") for the  development  of drugs to
          prevent or retard the  progression of Alzheimer's  disease.  Under the
          terms of the agreement, Eli Lilly will fund research and will have the
          first  opportunity  to develop  products from the  collaboration.  The
          Company may elect to develop other  products  from the  collaboration.
          The commercialization partner will make milestone and royalty payments
          to the other  partner.  In 1998, the agreement was amended to increase
          the funding for additional research staff to facilitate future product
          completions.
                                      F-10
<PAGE>

          f.   Agreements with Wyeth-Ayerst Laboratories

          In October 1996, the Company  entered into a  collaboration  agreement
          with  Wyeth-Ayerst,  an affiliate of American Home Products Corp., 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  for  these
          indications in North America and share  development costs and profits.
          Wyeth-Ayerst received exclusive marketing rights outside North America
          and within  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).

          In April 1996, the Company entered into an agreement with Wyeth-Ayerst
          to promote the antidepressant  Effexor(R) (venlafaxine  hydrochloride)
          to selected psychiatrists in the U.S. Under the agreement, the Company
          received payments based on achieving  specified  increases in sales to
          the  selected  psychiatrists  over an adjusted  base level during each
          contract year beginning in June 1996.  Wyeth-Ayerst  manufactured  and
          distributed  the  product.  The  agreement  was  terminated  by mutual
          agreement in April 1998.

          g.   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  the  Company's
          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,
          the Company and Genentech discontinued  development of Auriculin based
          upon the negative results of an interim study.

          h.   Agreement with Ortho-McNeil Pharmaceutical

          In July 1993,  the Company  entered  into a five-year  agreement  with
          Ortho-McNeil,  an affiliate of Johnson & Johnson,  to jointly  promote
          the injectable  antipsychotic Haldol(R) Decanoate (haloperidol) in the
          U.S.  Under the  agreement,  the Company  received  payments  based on
          achieving  specified  sales levels over a contract  year  beginning in
          August and ending in July.  Ortho-McNeil  manufactured and distributed
          the product. The agreement was terminated by mutual agreement in April
          1998.

          i.   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 a  specified  amount of
          Fiblast  product.  In  return,  the  Company  has  received  milestone
          payments,  which are contingent on Kaken's  continuing  development of
          the  product.  On December 31, 1998,  $15.9  million of the  Company's
          deferred  revenue  consisted of payments  received to date under these
          agreements.  The Company expects to complete production of the Fiblast
          product in  accordance  with its  agreement  prior to closing down its
          manufacturing operations.

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

          In June 1994,  Guilford,  then a fully consolidated  subsidiary of the
          Company,  completed an initial public  offering,  which  decreased the
          Company's  percentage  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,  12,500 shares in 1997,  and 70,000 shares in
          1998, the Company's ownership in Guilford has been reduced to 7%.
                                      F-11
<PAGE>

          The Company  continued to use the equity method of accounting  for its
          investment  in  Guilford   through   September  1998  because  it  had
          representation on Guilford's Board of Directors.  In October 1998, the
          Company reclassified its Guilford investment to marketable  securities
          because  of a change in the  Company's  representation  on  Guilford's
          Board of Directors.

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

          Unrealized  gains and losses on marketable  securities at December 31,
          1998 by classification were as follows:
<TABLE>
<CAPTION>
                                                            Accrued     Unrealized    Unrealized
          (in thousands)                   Cost Basis       Interest    Gains         Losses          Fair Value
                                           ----------       --------    ----------    ----------      ----------
          <S>                              <C>              <C>         <C>           <C>             <C>
          Debt securities:
            U.S. Government &
            Government Agency
            Securities                     $32,722          $286        $   346        ($7)           $33,347
          Corporate Bonds                   37,117           355            260        (21)            37,711
          Equity Investments                 8,736            --         10,834         --             19,570
                                           -------          ----        -------       -----           -------
            Total                          $78,575          $641        $11,440       ($28)           $90,628
                                           =======          ====        =======       =====           =======
</TABLE>


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

                                                            Accrued     Unrealized    Unrealized
          (in thousands)                   Cost Basis       Interest    Gains         Losses          Fair Value
                                           ----------       --------    ----------    ----------      ----------
          <S>                              <C>              <C>         <C>           <C>             <C>
          Debt securities:
            U.S. Government &
            Government Agency
            Securities                     $24,784          $131        $100           ($5)           $25,010
          Corporate Bonds                   28,957           343         112           (14)            29,398
          Equity Investments                    --            --          95           --                  95
                                           -------          ----        ----          -----           -------
            Total                          $53,741          $474        $307          ($19)           $54,503
                                           =======          ====        ====          =====           =======
</TABLE>

          The scheduled  maturities  for  marketable  securities at December 31,
          1998 by classification were as follows:
<TABLE>
<CAPTION>

                                             Maturity             Maturity
          (in thousands)                     1 year or less       Greater than 1 year
                                             --------------       -------------------
          <S>                                <C>                  <C>
          Debt securities:
            U.S. Government &
            Government Agency
            Securities                       $   283              $33,064
          Corporate Bonds                      3,624               34,087
          Equity Investments                  19,487                   83
                                             -------              -------
            Total                            $23,394              $67,234
                                             =======              =======
</TABLE>

          The Company  realized gains of $9,099,000 and losses of $96,000 on the
          disposal of  marketable  securities  during 1998 and gains of $176,000
          and losses of $298,000 on the disposal and  write-down  of  marketable
          securities during 1997.
                                      F-12
<PAGE>

 6.     Property and Equipment
        ----------------------
<TABLE>
<CAPTION>

          December 31,                                 1998           1997
                                                       ----           ----
          <S>                                          <C>            <C>
          (in thousands)

          Laboratory equipment                         $12,802        $11,880
          Computer and related equipment                 4,780          4,103
          Furniture and other                            2,519          2,421
          Buildings and building improvements           49,878         48,951
                                                       -------        -------
                                                        69,979         67,355
          Accumulated depreciation and amortization    (38,827)       (35,125)
                                                       -------        -------
                                                        31,152         32,230
          Construction in progress                       1,062          1,353
                                                       -------        -------
          Total                                        $32,214        $33,583
                                                       =======        =======
</TABLE>

 7.       Other Assets
          ------------
<TABLE>
<CAPTION>

          December 31,                                 1998           1997
                                                       ----           ----
          <S>                                          <C>            <C>
          (in thousands)
          Deposits                                     $  229         $  387
          Other assets                                    304            188
          Equity investments                            1,067          1,067
          Employee notes receivable                       368            594
                                                       ------         ------
          Total                                        $1,968         $2,236
                                                       ======         ======
</TABLE>

 8.   Other Accrued Liabilities
      -------------------------
<TABLE>
<CAPTION>

          December 31,                                 1998           1997
                                                       ----           ----
          <S>                                          <C>            <C>
          
          (in thousands)
          Accrued contract payable                     $ 1,220        $    19
          Accrued Medicaid rebates                         781          1,191
          Accrued payroll                                3,566          2,881
          Profit distribution to third parties           1,212          1,911
          Accrued clinical trial expenses                1,231            200
          Deferred equity purchase                          --          3,000
          Other                                          2,077          1,932
                                                       -------         ------
          Total                                        $10,087         $11,134
                                                       =======         =======
</TABLE>

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

          a.   Operating leases

          The Company  leases  facilities in  California  and the land where the
          Company's  Mountain  View,  California  facilities  are located  under
          operating leases.  The facilities lease expires in 2002 with an option
          to extend for six years and seven months.  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-13
<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>
                1999                         $  944              $327
                2000                            980                --
                2001                          1,016                --
                2002                            268                --
                2003                            203                --
                Thereafter                    1,652                --
                                             ------              ----
                Total                        $5,063              $327
                                             ======              ====
</TABLE>

          Rent expenses for all facilities  operating  leases was  approximately
          $963,000,   $1,112,000,   and  $1,177,000  in  1998,  1997  and  1996,
          respectively.

          b.   Borrowing arrangements

          In 1998, the Company's paid off two five-year  notes that were secured
          by equipment.

          In December  1997, the Company repaid a $3.0 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 $30.0 million. The $30.0 million was drawn down in March
          of 1997,  and bears  interest at the prime rate (7.75% at December 31,
          1998).  The loan is repayable in cash or the Company 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 $12.0  million to fund  expansion  of the  Company's
          manufacturing facility for Fiblast. The Company does not expect to use
          this source of funding as it will use third party manufacturing.

          d.   Natrecor supply contract

          The Company  has entered  into a  long-term  supply  agreement  with a
          manufacturer  for the supply of bulk Natrecor.  The contract  provides
          for the purchase of at least 25 kg of bulk solution over an eight-year
          period  at  a  maximum  price  of  48.0  million  German  marks  (U.S.
          equivalent at December 31, 1998, $29.0 million).

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

          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.  The  Company  has  accrued  $90,000 as  provision  for the
          liability or loss that may result from the settlement thereof.

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

          a.   Research commitments

          The Company's  commitments  for payments to research  consultants  and
          institutions  are  $75,000 in 1999,  $75,000 in 2000,  and  $58,000 in
          2001.
                                      F-14
<PAGE>

          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 purchased 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 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, 1998, $84,048 was accrued for payment
          in 1999  primarily  as a  result  of  royalties  associated  with  the
          commercialization of Guilford's Gliadel(R) wafer.

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

          Warrants to purchase  approximately  789,000  shares of the  Company's
          common stock at $26.74 per share expired  unexercised in June 1998. At
          December 31, 1998, there were no warrants outstanding.

          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, 1998.

          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.

          c.   Deferred compensation

          In September 1998, the Company  granted shares of restricted  stock to
          an  officer  and  director.  The shares  vest over a  two-year  period
          provided  that the  recipient is still  employed by the  Company.  The
          market value of the shares  awarded was $597,000 and has been recorded
          as a separate component of stockholders' equity. Deferred compensation
          is being amortized over the two-year period.
                                      F-15
<PAGE>

13.     Employee 401(k) Benefit Plan
        ----------------------------

          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 their
          salary  subject to current  statutory  limits.  In 1998,  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 $838,000 in 1998, $664,000 in 1997 and $649,000 in 1996.

14.     Stock Option Plans
        ------------------

          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  ("FMV") at date of grant for  incentive
          stock options or 85% of FMV for nonstatutory options). 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, 1998:
<TABLE>
<CAPTION>

                                                              Shares
              Plan        Shares          Options             Available
              Title       Authorized      Outstanding         for Grant         Option Price
              -----       ----------      -----------         ---------         ------------
              <S>         <C>             <C>                 <C>               <C>
              1983/86     2,200,000          480,867                 --         Not less than 85% of FMV*
              1989          170,000           25,000                 --         FMV
              1992        5,000,000        2,914,229          1,102,058         Not less than 85% of FMV
              1996        1,500,000        1,085,739            389,777         Not less than 85% of FMV
              NQ            443,161                0                 --         Not less than 85% of FMV
<FN>
          *FMV = fair market value
</FN>
</TABLE>

          Additional  information  with respect to the  activity of  outstanding
          options is summarized in the following table:
<TABLE>
<CAPTION>
                                                                                 Aggregate
                                                  Number of                      Price
          Common Stock                            Shares         Option Price    (in thousands)
                                                  ---------      ------------    --------------
          <S>                                     <C>            <C>             <C>

          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

               Granted                            1,515,475      $5.19-$12.75     13,245
    
                                      F-16
<PAGE>

               Exercised                           (677,249)     $3.50-$ 9.13     (4,524)
               Canceled                            (318,533)     $3.50-$20.54     (2,502)
                                                  ---------      ------------    -------

          Balances at December 31, 1998           4,505,835      $3.69-$21.13    $35,563
                                                  =========      ============    =======
</TABLE>

          The options  outstanding  by range of exercise  price at December  31,
          1998 are as follows:
<TABLE>
<CAPTION>

                                                                 Weighted
                                          Number of              Average                  Weighted
                                          Options                Remaining                Average
          Exercise Price                  Outstanding            Contractual Life         Exercise Price
          --------------                  -----------            ----------------         --------------
          <S>                             <C>                    <C>                      <C>
          $ 3.69-$ 6.13                    1,280,826             7.38                      $ 5.77
          $ 6.25-$ 7.13                      909,096             3.85                      $ 7.00
          $ 7.21-$ 9.13                    1,044,485             5.49                      $ 8.00
          $ 9.19-$10.88                      910,615             7.99                      $ 9.69
          $11.75-$21.13                      360,813             4.68                      $12.84
          -------------                    ---------             ----                      ------
          $ 3.69-$21.13                    4,505,835             6.14                      $ 7.89
          =============                    =========             ====                      ======
</TABLE>

          The  options  currently  exercisable  by  range of  exercise  price at
          December 31, 1998 are as follows:
<TABLE>
<CAPTION>

                                             Number of           Weighted
                                             Options             Average
          Exercise Price                     Exercisable         Exercise Price
          --------------                     -----------         --------------
          <S>                                <C>                 <C>
          $ 3.69-$ 6.13                        534,389           $ 5.82
          $ 6.25-$ 7.13                        823,283           $ 7.05
          $ 7.21-$ 9.13                        631,627           $ 8.27
          $ 9.19-$10.88                        258,217           $ 9.82
          $11.75-$21.13                        304,637           $12.85
          -------------                      ---------           ------
          $ 3.69-$21.13                      2,552,153           $ 8.07
          =============                      =========           ======
</TABLE>

          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   provision  of  Statement  of  Financial   Accounting
          Standards No. 123,  "Accounting for Stock-Based  Compensation"  ("SFAS
          123").

          The following pro forma  information has  been  prepared following the
          provisions of SFAS No. 123:
<TABLE>
<CAPTION>

          December 31,                                      1998           1997           1996
          ------------                                      ----           ----           ----
          <S>                                               <C>            <C>            <C>
          (in thousands, except per share amounts)

          Net loss - as reported                            $(2,363)       $(38,667)      $(18,403)
          Net loss - pro forma                               (6,331)        (40,163)       (19,029)
          Net loss per common share
             and per common share -
             assuming dilution -
             as reported                                    $ (0.06)          (1.07)      $  (0.51)

                                      F-17
<PAGE>

         Net loss per common share - pro forma
             and per common share -
             assuming dilution -
             pro forma                                      $ (0.17)       $  (1.10)      $  (0.53)
</TABLE>

          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>
                                                            1998           1997           1996
                                                            ----           ----           ----
          <S>                                               <C>            <C>            <C>

          Risk free interest rate                           5.29%          5.87%          6.41%
          Expected life (years)                             4.8            5.0            5.0
          Volatility                                        0.7916         0.7920         0.8134
          Dividend yield                                        --             --             --
</TABLE>

          The weighted  average fair value of options  granted in 1998, 1997 and
          1996 was $5.71, $4.33 and $3.92, 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.

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, 1998 for tax
          purposes available as follows:

          Federal NOL                                     $278,000,000
          State NOL                                         20,000,000
          Federal Research Credit                           15,200,000
          State Research Credit                              7,200,000

          These  federal  and state NOL  carryforwards  expire in the years 1999
          through  2013 and 1999  through  2003,  respectively.  The federal and
          state research credit  carryforwards  expire in the years 1999 through
          2013, and 2003 through 2013, respectively.

          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.

                                      F-18
<PAGE>

          The tax effects of temporary differences that give rise to significant
          portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
                                                                       December 31,
          (in thousands)                                         1998                1997
                                                                 ----                ----
          <S>                                                    <C>                 <C>
          Depreciable and amortizable
             assets, primarily technology                        $   9,100           $   7,900
          Other accrued liabilities                                  1,300               4,800
          State (net of federal benefit)                            13,800               8,800
          Net operating loss carryforward                           94,000              93,600
          Research credit                                           15,200              10,200
          Valuation allowance                                     (133,400)           (125,300)
                                                                 ---------           ---------
          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.

16.     Industry and Geographic Segment Information
        -------------------------------------------

          The Company has adopted the  Financial  Accounting  Standards  Board's
          Statement  of Financial  Accounting  Standards  No. 131,  "Disclosures
          about  Segments  of an  Enterprise  and Related  Information",  ("SFAS
          131").   SFAS  131  supercedes   Statement  of  Financial   Accounting
          Standards, "Financial Reporting for Segments of a Business Enterprise"
          ("SFAS  14").  SFAS 131  changes  current  practice  under  SFAS 14 by
          establishing  a new  framework on which to base segment  reporting and
          also requires interim reporting of segment information.

          Management uses one measurement of profitability for its business. The
          Company  receives  revenue from product  sales and from  licensing and
          development  of  products.  The Company  markets  its  products in the
          United States and Japan and received  licensing  revenue from partners
          in the United  States,  Europe and Asia  Pacific  and  operates in one
          business segment.

          Revenue and  long-lived  assets by  geographic  area as of and for the
          year ended:
<TABLE>
<CAPTION>
                                                                      Long lived
          (in thousands)                          Revenues            Assets
                                                  --------            ----------
          <S>                                     <C>                 <C>
          December 31, 1998:
            U.S.                                  $42,243             $32,214
            International                          31,472                  --
                                                  -------             -------
            Total                                 $73,715             $32,214
          December 31, 1997:
            U.S.                                  $46,609             $33,583
            International                             820                  --
                                                  -------             -------
            Total                                 $47,429             $33,583
          December 31, 1996:
            U.S.                                  $63,834             $36,839
            International                             389                  --
                                                  -------             -------
            Total                                 $64,223             $36,839
</TABLE>
                                      F-19
<PAGE>

17.     Subsequent Event
        ----------------

          On  March  1,  1999,  the  Company   announced  a  restructuring   and
          right-sizing plan that includes  reduction of the Company's  full-time
          workforce   by  approximately  30%  and   the   consolidation  of  its
          headquarters,  development  and research staff into  currently  leased
          facilities in Sunnyvale,  California.  In the first half of 1999,  the
          Company will close its manufacturing  facility due to its low capacity
          and high operating  expenses and the ready availability of third party
          recombinant  protein  manufacturing  capacity.  The Company's Mountain
          View,  California,  campus will be sold. The consolidation is expected
          to create  improved  management  and  operational  synergies  and save
          approximately $14.0 million annually.  In the quarter ending March 31,
          1999,  the  Company  will  record a one-time  restructuring  charge of
          approximately  $7.0  million  for the  disposition  of certain  excess
          assets and severance costs.




















                                      F-20
<PAGE>