<PAGE>

                                   UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION 
                              Washington, D.C. 20549 
                                     FORM 10-K
                                  ________________

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                    For the fiscal year ended December 31, 1998
                                          
                                         OR

[  ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                          Commission File Number: 0-27972
                              TREGA BIOSCIENCES, INC.
               (Exact Name of Registrant as Specified in its Charter)
                             --------------------------
                                          
                   DELAWARE                               51-0336233
        (State or Other Jurisdiction of                (I.R.S. Employer
        Incorporation or Organization)               Identification No.)
            9880 CAMPUS POINT DRIVE                         92121
             San Diego, California                        (Zip Code)
   (Address of principal executive offices)

                                          
     (Registrant's telephone number, including area code):  (619) 410-6500
                             --------------------------
            Securities registered pursuant to Section 12(b) of the Act: 
                                       NONE 
            Securities registered pursuant to Section 12(g) of the Act: 
                            COMMON STOCK $.001 PAR VALUE
                                  (Title of Class)

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

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

  The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 26,
1999, as reported on the Nasdaq National Market, was approximately $16,468,975.
Shares of Common Stock beneficially held by each officer and director of the
Registrant and by each person who beneficially owns 10% or more of the
Registrant's outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

  As of March 26, 1999, there were 18,022,272 shares of the Registrant's Common
Stock outstanding.


                        DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders which is presently expected to be held on May 18, 1999, which Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or before April 16, 1999 and is referred to herein as the "Proxy Statement," are
incorporated herein by reference into Part III hereof as provided in such Part.


<PAGE>



                              TREGA BIOSCIENCES, INC.

                                     FORM 10-K

                                       INDEX


<TABLE>
<CAPTION>

                                        PART I                             PAGE
                                                                          -----
<S>               <C>                                                     <C>
Item 1.           Business..............................................     3
Item 2.           Properties............................................    15
Item 3.           Legal Proceedings.....................................    15
Item 4.           Submission of Matters to a Vote of Security Holders...    15

                                          PART II

Item 5.           Market for Registrant's Common Equity and Related
                  Stockholder Matters...................................    17
Item 6.           Selected Financial Data...............................    18
Item 7.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations...................    19
Item 7a.          Qualitative and Quantitative Disclosure About Market      
                  Risk..................................................    22
Item 8.           Financial Statements and Supplementary Data...........    24
Item 9.           Changes in and Disagreements With Accountants on
                  Accounting and Financial Disclosure...................    24

                                          PART III

Item 10.          Directors and Executive Officers of the Registrant....    24
Item 11.          Executive Compensation................................    24
Item 12.          Security Ownership of Certain Beneficial Owners and 
                  Management............................................    24
Item 13.          Certain Relationships and Related Transactions........    24

                                          PART IV                         

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

SIGNATURES..............................................................    28

</TABLE>

                                       2
<PAGE>


                                       PART I


ITEM 1.   BUSINESS

  EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS 
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS 
THAT INVOLVE RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS 
INCLUDE, WITHOUT LIMITATION, STATEMENTS USING SUCH WORDS AS "MAY," 
"POTENTIAL," "EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS," 
"ANTICIPATES" AND SIMILAR EXPRESSIONS).  FOR A DISCUSSION OF CERTAIN FACTORS 
WHICH MAY AFFECT THE OUTCOMES PROJECTED IN SUCH STATEMENTS, SEE "RISK 
FACTORS" ON PAGES 9 TO 15 OF THIS ANNUAL REPORT ON FORM 10-K.  ACTUAL RESULTS 
MAY DIFFER MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-LOOKING STATEMENTS 
REPRESENT THE COMPANY'S JUDGMENT AS OF THE DATE OF THE FILING OF THIS ANNUAL 
REPORT ON FORM 10-K.  THE COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR 
OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.

OVERVIEW

  Trega Biosciences, Inc. (the "Company" or "Trega") is a drug discovery company
focused on accelerating the process of drug discovery by using small molecule
combinatorial chemistry and other drug discovery technologies to create novel
drugs having greater chances of clinical success.  In combination with its
wholly owned subsidiary, NaviCyte, Inc. ("NaviCyte"), Trega offers products and
services to the pharmaceutical and biopharmaceutical industries.  Trega also
uses its drug discovery technologies in its internal development programs, which
are focused on discovering small molecules acting on melanocortin ("MC")
receptors, which may be important in the treatment of inflammatory and metabolic
diseases.


TREGA'S BUSINESS STRATEGY

  Trega's objective is to be a leading developer of and resource for drug
discovery and selection technologies and to deliver early-stage clinical
development candidates that are active against disease targets of importance to
major pharmaceutical and biotechnology companies.  In 1998, Trega invested
significantly in three areas: 

     (1)  the further development of combinatorial chemistry libraries formatted
          in singles-based compound arrays;

     (2)  the screening of the Company's combinatorial chemistry libraries
          against a series of MC receptors; and

     (3)  the addition of expertise and technology development programs with
          respect to drug selection tools (through the acquisition of NaviCyte).

  Trega's commercial approach focuses on the development and implementation of a
sustainable business strategy principally through a mix of corporate
collaborations, internal discovery programs and value added products and
services not dependent on regulatory approval for marketing.  To implement its
strategy Trega intends to:

 -   Enter into collaborations to provide pharmaceutical companies with access
     to Trega's combinatorial chemistry libraries and individually synthesized
     compounds.  Trega has current drug discovery collaborations which include
     an arrangement with Ono Pharmaceuticals Co., Ltd. ("Ono"), focusing on the
     identification of small-molecule agonists of MC-1 to treat inflammatory
     conditions, and an arrangement with Novartis Pharma AG ("Novartis"),
     focusing on treatments of certain diseases believed to be mediated by the
     MC-4 receptor pathway such as obesity, Type II diabetes and Syndrome X.

  -  Discover and develop selected compounds through early-stage clinical 
     trials in an effort to demonstrate their potential value.  Presently, 
     Trega is pursuing the discovery and development of small-molecule 
     compounds that are active against MC receptors.  Trega is currently 
     screening its small-molecule combinatorial chemistry libraries against 
     these receptors, which have been identified as playing a role in the 
     body's inflammatory processes and in metabolic diseases, in an effort to 
     discover potential drug leads. In 1993, Trega used its combinatorial 
     chemistry technologies to discover a family of proprietary compounds 
     that appear to influence the production and activity of 
     anti-inflammatory and pro-inflammatory cytokines through interaction 
     with the MC receptors.  One of these compounds, HP 228, is in the final 
     stages of a Phase II clinical study evaluating its effectiveness in 
     relieving post-surgical pain (an inflammatory condition) in patients 
     undergoing elective hip or knee replacement surgery.  If the results of 
     the study support further development, Trega intends to seek a 
     pharmaceutical partner to undertake such development.  Trega intends to 
     selectively develop, to early-stage clinical development, a limited 
     number of future discoveries from internal efforts or screening 
     alliances with other companies.  For further development, Trega would 
     attempt to partner any such discoveries with major

                                       3
<PAGE>

     pharmaceutical companies (prior to the initiation of Phase II clinical
     trials when possible) in order to mitigate the costs associated with
     development and commercialization, and to gain access to development and
     marketing expertise.

-    Support the drug discovery efforts of pharmaceutical and biopharmaceutical
     customers by offering, through Chem.Folio-TM-, non-exclusive access to
     diverse, small-molecule compound libraries.  Since the introduction of its
     Chem.Folio-TM- program in mid-1998, Trega has entered into arrangements for
     the sale of combinatorial chemistry libraries to Biogen, Inc. ("Biogen"),
     Isis Pharmaceuticals, Inc. ("Isis") and the Parke-Davis Division of 
     Warner-Lambert Company ("Parke-Davis").

-    Develop, through NaviCyte, products and services to facilitate the rapid
     screening of drug development candidates for pharmacokinetic
     characteristics.  NaviCyte, acquired by Trega in November 1998, is
     developing products and services to facilitate the rapid screening of drug
     development candidates for pharmacokinetic characteristics (such as how
     such candidates are absorbed in humans, distributed through the body,
     metabolized and excreted).  In addition, NaviCyte is in the early stages of
     developing a model that is intended to assist in predicting the
     pharmacokinetic and toxicological properties of new compounds based on
     their chemical structure.  The products and services under development by
     NaviCyte are intended to provide critical information necessary for drug
     candidate selection early in the drug discovery process.

RECENT DEVELOPMENTS

  ChromaXome

  On March 16, 1999, substantially all of the assets of ChromaXome Corp., a
wholly owned subsidiary of Trega ("ChromaXome"), were sold to TerraGen Discovery
Inc. ("Discovery"), the wholly owned subsidiary of TerraGen Diversity Inc.
("Diversity").  As consideration for the sale, ChromaXome received $2 million in
cash, interest-bearing promissory notes of Discovery with an aggregate principal
amount of $3 million and 600,000 shares of Diversity preferred stock.  Of the $3
million in principal amount of notes, $2 million is payable no later than
December 31, 1999 and the remaining $1 million is payable no later than June 30,
2000, with the entire amount secured by Discovery's pledge of the assets
acquired from ChromaXome.

  Until the closing of such sale, Trega had been conducting an early-stage
combinatorial biology program through ChromaXome (which the Company acquired in
August 1996).  In combinatorial biology, scientists attempt to create libraries
of potentially new compounds through the  molecular manipulation, cloning and
transfer of genetic material from a naturally occurring microorganism into a
suitable industrial microbial host.  As a result of Trega's current focus on
developing technologies that add to its drug discovery techniques (such as the
drug candidate selection tools under development by NaviCyte), the Company
determined that further development of a parallel technology to create molecular
diversity (i.e., combinatorial biology as compared to Trega's core competency in
combinatorial chemistry) created unneeded redundancy and diverted funds and
other resources away from complementary development programs.

  As a result of the sale, eight persons formerly employed by ChromaXome have
become employees of Discovery (comprising the entire  staff of ChromaXome at the
time of the sale).

  NaviCyte

  On November 23, 1998, Trega acquired all of the outstanding shares of 
NaviCyte's capital stock.  In exchange, (i) holders of NaviCyte capital stock 
prior to the acquisition received, in the aggregate: (a) $210,000 in cash and 
(b) 1,428,231 shares of Trega's Common Stock; and (ii) holders of options to 
acquire NaviCyte capital stock prior to the acquisition received, in the 
aggregate, options to acquire 1,071,756 shares of Trega's Common Stock. In 
addition, Trega made an aggregate of $350,000 in advances to NaviCyte.

TREGA'S DRUG DISCOVERY TECHNOLOGIES

  Combinatorial Chemistry

  A principal technique for discovering drugs involves screening chemical
compounds against biological assays to identify those compounds that trigger a
desired activity.  This technique requires access to a large collection of
compounds that can be rapidly tested for activity in assays representing
biologic intervention points (targets). Combinatorial chemistry, which is a
technique for simultaneously creating thousands of chemical compounds, directly
addresses the demand for large collections of compounds.  Combinatorial
chemistry involves rapidly and systematically assembling a variety of molecular
entities, or building blocks, in many different combinations to create libraries
of diverse compounds that can be tested in drug discovery screening assays to
identify potential lead compounds.

  The Company believes that its combinatorial chemistry technologies facilitate
the rapid identification of lead compounds for its pharmaceutical partners and
for its internal discovery programs by creating compounds that offer the
following important characteristics:

                                       4
<PAGE>

-    PHARMACEUTICALLY RELEVANT COMPOUNDS.  The Company believes that its
     libraries are designed to produce significant numbers of pharmaceutically
     relevant compounds.  Trega's combinatorial chemistry libraries are
     carefully created to meet the design, diversity, quality and purity
     criteria preferred by the pharmaceutical industry.

 -   TEMPLATE NOVELTY.  The Company believes that the distinctive core
     structures, or templates, around which the Company's small-molecule
     libraries are built possess the physico-chemical weights and structures
     characteristic of pharmaceutical compounds, yet have not previously been
     thoroughly explored as potential drugs.  Trega has applied for patents on
     nearly all of these libraries. 

-    EASY-TO-SCREEN FORMATS.  Trega's libraries are formatted in 
     singles-based compound arrays and consist of compounds free in solution, 
     without interfering solid supports, such as beads, pins, chips or tags.  
     These libraries do not require use of deconvolution strategies commonly 
     employed to identify active compounds in mixture-based libraries.  
     Moreover, compounds formatted as singles-based compound arrays are 
     created and screened as individual compounds to facilitate the rapid 
     identification of active compounds.

-    VALIDATION.  Multiple leads and highly active compounds have been
     identified and/or optimized utilizing Trega's technologies, both by Trega
     and in several of the Company's external collaborations.

  Design of Libraries

  Trega's screening libraries are designed and constructed by medicinal chemists
to meet stringent purity, molecular weight and quantity requirements optimized
for the pharmaceutical industry.  Trega's combinatorial chemistry approach to
the design and synthesis of novel, diverse chemical libraries involves the
integration of medicinal chemistry, computational design, solid-phase chemical
synthesis, the patented Tea-Bag method of simultaneous parallel synthesis and
automated library synthesis. 

  Trega focuses its combinatorial library synthesis program on creating diverse,
low molecular weight compounds, especially heterocyclic structures. 
Heterocycles, as a class of compounds, are considered desirable pharmaceutical
candidates because they are more likely to be orally available, are generally
less expensive to manufacture and typically have a longer duration of action
than other compound classes such as peptides and proteins.  The Company believes
that compounds of low molecular weight, especially heterocycles, represent the
majority of drugs currently on the market.

  Extending the range of Trega's libraries involves developing novel templates
and, subsequently, libraries based on those templates.  These new libraries are
designed to add to the structural diversity of Trega's existing libraries,
thereby enhancing their utility by increasing the likelihood that screening of
the libraries against a particular biological target will result in
identification of a compound with activity against that target.

  Once a lead compound is identified from a screening library, Trega utilizes a
computational representation of the possible compounds that can be created
around that structure to uncover a set of closely related compounds that can be
synthesized in highly purified form and screened to identify the most active
chemical structure.

  Melanocortin Biology

  In 1993, Trega used its early combinatorial chemistry technologies to discover
a family of proprietary peptide compounds that appear to influence the
production and activity of anti-inflammatory and pro-inflammatory cytokines
(hormone-like proteins that act as messengers between cells) through interaction
with the MC receptors.   HP 228, the only compound from this family currently
being advanced by the Company, is presently the subject of a Phase II clinical
trial to evaluate its effectiveness in treating acute, post-surgical pain (an
inflammatory condition) in patients undergoing elective hip or knee replacement
surgery.  If the results of the study support further development, Trega intends
to seek a pharmaceutical partner to undertake such development.

  Trega's internal drug discovery programs are currently focused on the
identification of small-molecule compounds active against a series of known MC
receptors, some of which have been shown to play a role in inflammatory
processes and metabolic diseases.  Active compounds that interact with these
receptors may be useful in treating inflammatory conditions (such as pain,
asthma and arthritis) or metabolic conditions (such as diabetes and obesity).

  Trega's internal discovery strategy includes collaborating with 
pharmaceutical partners to identify small-molecule compounds active against 
the MC receptors by screening the Company's small-molecule combinatorial 
chemistry libraries.  In 1997, Trega entered into an alliance with Ono to 
identify small-molecule agonists of MC-1 to treat inflammatory conditions.  
(See "Trega's Collaborations--Ono" below.)  In May 1998, Trega entered into a 
collaboration with Novartis to identify, develop and

                                       5
<PAGE>

commercialize orally-active small molecules for the treatment of certain 
diseases believed to be mediated by the MC-4 receptor pathway, including 
obesity, Type II diabetes and Syndrome X.  (See "Trega's 
Collaborations--Novartis" below.)

  NaviCyte

  NaviCyte, acquired by Trega in November 1998, is developing products and
services to facilitate the rapid screening of drug development candidates for
pharmacokinetic characteristics (such as how such candidates are absorbed into
humans, distributed through the body, metabolized and excreted).  In addition,
NaviCyte is in the early stages of developing a model that is intended to assist
in predicting the pharmacokinetic and toxicological properties of new compounds
based on their chemical structure.  The products and services under development
by NaviCyte are intended to provide critical information necessary for drug
candidate selection early in the drug discovery process.

  As part of its efforts, NaviCyte has assembled a collaborative consortium, 
presently focused on the early stage development of a model to predict the 
absorption into the human body of potential drug candidates. Current 
consortium subscribers include SmithKline Beecham PLC, Parke-Davis, Genentech 
Inc., Schering-Plough Corp. and Johnson & Johnson's R.W. Johnson 
Pharmaceutical Research Institute.  Subscription, which requires the payment 
of an up-front fee and certain milestone payments, yields access to the 
current phase of the evolving predictive model.  Following the completion of 
the current phase of the model regarding absorption, NaviCyte intends to 
continue with a second phase to predict human metabolism of potential drug 
candidates.

  NaviCyte has acquired, from the Memorial Sloan-Kettering Cancer Research
Institute, a worldwide, exclusive license for all commercial applications of the
Caco-2 cell line and its derivatives.  The Company believes that the Caco-2 cell
line is currently the most widely used cell line for in-vitro estimation of the
oral absorption of compounds.  NaviCyte currently grants nonexclusive
sublicenses at a relatively modest cost to companies wishing to use the Caco-2
cell line for their internal use and to service firms for use in contract
research studies.  NaviCyte also sells Caco-2 cells, which are time consuming to
grow and require skill in cell culture techniques. 

  In addition to the foregoing, NaviCyte presently markets (for distribution by
Corning, Incorporated (United States, Europe and Japan) or Toyobo (Japan)) two
types of diffusion chambers.  NaviCyte also has developed a contract testing
business for pharmaceutical and biotechnology companies, with an emphasis on in
vitro permeability and metabolism studies.

TREGA'S COLLABORATIONS

  Trega has current drug discovery collaborations with Novartis, Ono and Chugai
Biopharmaceuticals, Inc. ("Chugai").

-    NOVARTIS.  In May 1998, Trega entered into a Research, Development and
     License Agreement with Novartis pursuant to which the companies are focused
     on the identification and development of orally-active small molecules for
     the treatment of certain diseases believed to be mediated by the MC-4
     receptor pathway, including obesity, Type II diabetes and Syndrome X.  The
     Agreement provides for (i) an equity investment at Trega's option, which
     the Company exercised in November 1998 and received $7 million in exchange
     for approximately 1.9 million shares of the Company's Common Stock; (ii) an
     additional $12 million in committed funding (consisting of $2 million
     received upon the execution of the Agreement for past research activities
     and $10 million over a three-year period); and (iii) potential milestone
     payments and royalties from the successful development and
     commercialization of products (for which Novartis has worldwide rights).

-    ONO.  In June 1997, Trega entered into a Research and Development Agreement
     with Ono pursuant to which the Company is screening its combinatorial
     chemistry libraries and certain of Ono's chemical compounds against an MC-1
     receptor screen to identify potential small-molecule agonists of the
     receptor to treat inflammatory conditions.  Trega received an up-front
     license fee and an additional payment for work to be done during the first
     12 months under the Agreement.  In July 1998, as a result of achieving a
     milestone under the Agreement, Trega received $2 million to fund the next
     phase of the program.  Trega will also receive milestone and royalty
     payments on products it discovers which are subsequently developed and
     marketed by Ono, if any.  Rights to commercialize products resulting from
     the arrangement, if any, will belong to Ono in China, Japan, South Korea
     and Taiwan and to Ono and Trega in Europe, with Trega holding such rights
     with respect to North America and the rest of the world.  In May 1998,
     Trega and Ono reached a definitive agreement to expand their relationship. 
     Under the new agreement, Trega is creating additional custom combinatorial
     libraries and optimizing lead compounds discovered by Ono, and has
     undertaken screening of those compounds in a target of interest to Ono.  As
     part of the new relationship, Trega received approximately $1.9 million in
     research funding.

-    CHUGAI.  The collaboration with Chugai, a subsidiary of Chugai
     Pharmaceutical Co., Ltd., was initiated in January 1997. Pursuant to this
     arrangement, Trega provides Chugai with combinatorial libraries which
     Chugai screens against a range of targets.  Compounds identified with
     activity in bone, cardiovascular and infectious diseases as well as
     hematological growth factors and oncology may be developed by Chugai, and
     Chugai would pay milestone payments and royalties on compounds, if any,
     discovered from Trega's libraries and subsequently developed and marketed
     by Chugai (for which Chugai would have worldwide rights).  Chugai and Trega
     would jointly own any compounds with identified activity in Chugai's
     inflammation screens.  In addition, Trega may develop any compounds

                                       6

<PAGE>

     discovered in selected Chugai screens targeted at obesity and central
     nervous system diseases, with a royalty obligation payable to Chugai for
     any compounds that are commercialized.

  With respect to certain of Trega's other collaborations, the screening periods
or active phases for collaborations between the Company and each of Novo Nordisk
A/S, Proctor & Gamble and a major ophthalmic company have expired within the
past year.  In addition, Trega's drug discovery alliances with Chiroscience
Group, plc., RiboGene, Inc. and Cadus Pharmaceutical Corporation have either
terminated or are presently inactive.

CHEM.FOLIO-TM-

  In July 1998, Trega introduced Chem.Folio-TM-, a portfolio of combinatorial
chemistry screening libraries, to provide companies with the opportunity to
benefit from access to Trega's existing combinatorial chemistry libraries. 
Chem.Folio-TM- is targeted at organizations requiring only non-exclusive access
to compounds for use in their internal screening programs.  Optimization and
resupply services, as well as technology transfer and screening for drug
selection, are also available from Trega for Chem.Folio-TM- customers.

  Chem.Folio-TM- customers include (i) Biogen which, pursuant to an October 1998
agreement, will provide Trega with funding of $7.5 million over two years for
the purchase of Trega's combinatorial chemistry libraries; (ii) Parke-Davis
which, pursuant to a December 1998 agreement (which superseded a May 1997
agreement calling for Parke-Davis' purchase of $1.5 million worth of the
Company's Common Stock), agreed to purchase $1.5 million worth of the Company's
combinatorial chemistry libraries; and (iii) Isis pursuant to a March 1999
agreement.

  Chem.Folio-TM- screening libraries are designed by experienced medicinal 
chemists using state-of-the-art computational software to include diverse, 
drug-like molecules.  Each Chem.Folio-TM- library is designed to be maximally 
diverse within the constraints of producing drug leads.  Each library is put 
through a two-step quality control process to ensure the final product meets 
industry purity standards.

CERTAIN LICENSE AND OTHER TECHNOLOGY ARRANGEMENTS 

  Torrey Pines Institute for Molecular Studies ("TPIMS")

  Pursuant to a Restated and Third Amended Research and Option Agreement with 
TPIMS (the "TPIMS Agreement"), Trega historically has relied upon TPIMS, a 
not-for-profit biomedical research institute founded by the founder of the 
Company (Dr. Richard Houghten), for certain basic research and laboratory 
facilities and scientific personnel necessary for the Company to conduct a 
significant portion of its combinatorial chemistry business.  As a result of 
(i) Trega's development of internal resources and personnel to support the 
conduct of its combinatorial chemistry business and (ii) Trega's adoption of 
techniques for the creation of combinatorial libraries in singles-based 
arrays, which techniques are not within the special interest of TPIMS in 
creating mixture-based libraries, the Company is no longer dependent upon 
TPIMS for those facilities and services previously provided.

  Given their divergence in directions and Trega's development of internal 
resources, the Company notified TPIMS that it would not extend the TPIMS 
Agreement (which thus expired on April 14, 1998).  However, pursuant to the 
TPIMS Agreement, Trega continued with funding for TPIMS through July 14, 1998.

  Pursuant to the TPIMS Agreement, Trega purchased TPIMS' entire right, title 
and interest in and to certain technology that arose at TPIMS and was 
identified in the Agreement, subject to the continuing rights of the United 
States government, if any, and of TPIMS to use the technology for academic 
purposes.  This purchase eliminated the obligation of Trega to make milestone 
payments and to pay royalties in respect of products based upon this 
technology.  The purchase price pertaining to these rights was $1.3 million.

  Subsequently, as of March 4, 1998, Trega entered into a Services and License
Agreement (the "Services Agreement") with TPIMS which gives the Company the
opportunity to call upon TPIMS for chemistry services on an as-needed basis. 
Under the Services Agreement, Trega returned to TPIMS for its use certain
combinatorial chemistry libraries which were of no further interest to the
Company, and TPIMS agreed to give the Company a right of first refusal in the
field of MC receptor ligands.

  Dura Pharmaceuticals, Inc.

  In February 1996, Trega entered into a Research and Development Agreement with
Dura Pharmaceuticals, Inc. ("Dura").  Dura markets pharmaceuticals for the
treatment of respiratory diseases and is developing a dry powder inhalation
system for pulmonary delivery of respiratory drugs and other pharmaceuticals. 
Pursuant to this Agreement, Trega committed to provide funding totaling
$6,000,000 over four years to seek to apply Dura's proprietary drug delivery
technology to Company compounds.  As of December 31, 1998, $4,650,000 had been
funded by Trega since the inception of the Agreement.  Concurrent with the
execution of the Agreement, Dura purchased shares 

                                       7

<PAGE>

of the Company's preferred stock, which were converted to shares of the 
Company's Common Stock upon closing of Trega's initial public offering, for 
$5,000,000.

  In April 1998, Trega initiated a Phase I dose-escalation trial evaluating the
safety of administering HP 228 to the lungs.  In the trial, HP 228 was delivered
using Dura's proprietary pulmonary drug delivery system.  In September 1998,
Trega announced completion of four of the five planned dosage groups, with the
Company electing not to study the highest dosage level.  Preliminary data
indicated systemic absorption to the lungs and no safety problems at the doses
studied.

  If applicable, Trega and Dura have agreed to negotiate certain manufacturing
and licensing agreements for any Company compounds successfully developed using
Dura's technologies. Separately, Dura will have the option to participate in
funding the development of, and to receive a commensurate share of the
commercial benefits from, respiratory compounds discovered and owned by Trega in
the course of its drug discovery efforts.

  The Scripps Research Institute ("Scripps")

  Trega is the assignee of a license to the method patent covering the Tea Bag
simultaneous parallel solid-phase synthesis technology from Scripps.  This
license was acquired from the technology's inventor, Dr. Richard Houghten. 
Trega, under certain circumstances, may be required to pay royalties to Scripps
for use of the Tea Bag technology.

  Chiron Corporation

  Pursuant to agreements with Chiron Corporation ("Chiron"), in January 1994,
Trega and Chiron cross-licensed certain patent rights held by each company
related to the synthesis and screening of peptide libraries.  The combined
cross-licensed portfolios of patent rights provide substantial research
platforms and methodologies for developing and screening peptide libraries.  The
rights granted by Trega to Chiron include rights to utilize the Tea Bag method
of synthesis (including synthesis of non-peptide libraries).  Trega is required
to pay royalties to Chiron on products generated using Chiron's technology.

  Northwest Neurologic, Inc.

  As of May 30, 1997, Trega entered into a Research & License Agreement with
Northwest Neurologic, Inc. ("NNL"), which was subsequently amended (the "NNL
License Agreement").  Under the NNL License Agreement, Trega acquired a
nonexclusive license to certain technology related to the MC receptors for use
in a defined field.  In exchange, Trega agreed to pay cash to NNL and to provide
NNL with the use of up to 10 combinatorial libraries and certain other services
to be provided by the Company.  Each party will owe milestone payments and
royalties to the other based upon the development and commercialization of
products employing the technology received under the NNL License Agreement.  In
March 1998, NNL was acquired by Neurocrine Biosciences, Inc.

PATENTS

  The Company's policy is to file patent applications to protect technology, 
inventions and improvements that are considered important to the development 
of its business. The Company currently pursues patent protection for its 
combinatorial chemistry technologies and libraries, its efforts in the 
melanocortin area, and its selection technologies through its NaviCyte 
subsidiary. Currently, the Company has approximately 26 issued United States 
patents and 34 pending United States patent applications. It is the Company's 
policy to pursue foreign patent protection where appropriate and the Company 
currently has over 150 pending foreign patent applications or foreign issued 
patents. The patent positions of pharmaceutical and biotechnology firms, 
including the Company, are uncertain and involve complex legal and factual 
questions for which important legal principles are largely unresolved.

RESEARCH AND DEVELOPMENT EXPENSES

  Trega incurred research and development expenses totaling approximately 
$17.9 million, $14.8 million and $11.8 million in 1998, 1997 and 1996, 
respectively. (See "Item 7--Management's Discussion and Analysis of 
Financial Condition and Results of Operations" below.)

EMPLOYEES

  As of March 12, 1999, the Company had 108 full-time employees, including 81 
in research and development.  Of the Company's total employees, approximately 
48 hold advanced degrees.  Trega places an emphasis on obtaining the highest 
available quality of staff.  Trega has selected and assembled a group of 
experienced scientists and managers with skills in a wide variety of 
disciplines, including chemistry, biology and pharmaceutical development.  
None of the Company's employees are covered by collective bargaining 
arrangements and management considers relations with its employees to be 
good.

                                       8

<PAGE>

RISK FACTORS

   THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT 
FACTORS, AMONG OTHERS (INCLUDING THOSE NOTED ELSEWHERE IN THIS ANNUAL REPORT 
ON FORM 10-K), IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT, 
THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE THE COMPANY'S ACTUAL 
CONSOLIDATED RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE 
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE 
COMPANY.

NEW AND UNCERTAIN TECHNOLOGIES AND BUSINESS

  Drug discovery methods based upon combinatorial chemistry technology are 
relatively new compared to traditional methods of drug discovery and there 
can be no assurance that these methods will lead to the discovery or 
development of commercial pharmaceutical products or that the Company will be 
able to employ these or other methods of drug discovery successfully.  
Moreover, the Company's technology development programs, including the 
Company's selection, screening and predictive technology programs (conducted 
through NaviCyte) and the Company's efforts to synthesize compounds through 
automation, are at early stages of development, and there can be no assurance 
that such technology programs will be developed or employed successfully, 
work efficiently or otherwise enhance the Company's ability to engage 
effectively in drug discovery. The types of combinatorial libraries the 
Company is capable of offering, the nature of the compounds the Company is 
able to synthesize and the relative value of any other drug development 
technologies which the Company may be able to provide will, in large part, 
determine the demand for the Company's drug discovery capabilities.  An 
inability to offer competitive libraries or other drug development 
technologies, or an inability to synthesize compounds that have actual or 
potential utility, would have a material adverse effect on the Company.  
Failures in the field of drug discovery, including combinatorial chemistry, 
could have a material adverse effect on the Company.
  
DEPENDENCE ON COLLABORATORS
  
  The Company's strategy for the utilization of its drug discovery 
technologies and for the development, clinical testing, manufacturing and 
commercialization of any compounds depends upon the formation of 
collaborations and arrangements with corporate collaborators, licensors, 
licensees and others.  There may only be a limited number of pharmaceutical 
and biotechnology companies that would potentially collaborate with the 
Company.  Historically, pharmaceutical and biotechnology companies have 
conducted lead compound identification and optimization within their own 
research departments, due to the highly proprietary nature of the activities 
being conducted, the central importance of these activities to their drug 
discovery and development efforts and the desire to obtain maximum patent and 
other proprietary protection on the results of their internal programs. 
Pharmaceutical and biotechnology companies must be convinced that the 
Company's drug discovery technologies and expertise justify outsourcing these 
programs to the Company. The amount and timing of resources that current and 
future collaborators, if any, devote to collaborations with the Company are 
not within the control of the Company.  There can be no assurance that such 
collaborators will perform their obligations as expected or that the Company 
will derive any additional revenue from such arrangements.  Because the 
Company's arrangements with its collaborators may entail the provision of 
identical or similar libraries or compounds to multiple parties, there can be 
no assurance that conflicts will not arise between collaborators as to 
proprietary rights to particular libraries or as to particular compounds in 
the Company's libraries.  Moreover, the Company's collaborations may be 
terminated under certain circumstances by its collaborators, which 
terminations could result in the Company relinquishing rights to products 
developed jointly with its collaborators.  Any such conflicts or terminations 
could have a material and adverse effect on the Company.

  There can be no assurance that (i) the Company's present or any future
collaborators will not pursue their existing or alternative technologies in
preference to those of the Company, (ii) any product will be developed and
marketed as a result of such collaborations or (iii) the Company will be able to
negotiate additional collaborative arrangements in the future on acceptable
terms, if at all, or that such current or future collaborative arrangements will
be successful.  To the extent that the Company chooses not to or is unable to
establish such arrangements, it will require substantially greater capital to
undertake the research, development and marketing of products at its own
expense.  In addition, the Company may encounter significant delays in
developing compounds or find that the development, manufacture or sale of its
proposed products is materially and adversely affected by the absence of such
collaborative agreements.

EARLY STAGE OF PRODUCT DEVELOPMENT

  The Company's research and product development programs (including the
Company's program with respect to potential drug candidates for the treatment of
diseases believed to be mediated by the melanocortin receptor pathway) are at
early stages.  Any compounds resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years, if ever, even if any such compounds are successfully developed and
proven to be safe and effective.  There can be no assurances that any of the
Company's product development efforts will be successfully completed, that
development arrangements with 

                                       9

<PAGE>

pharmaceutical partners will be established on acceptable terms, if at all, 
that regulatory approvals will be obtained or will be as broad as sought, 
that any candidate products will be capable of being produced in commercial 
quantities at reasonable cost, or that any products, if introduced, will 
achieve market acceptance or profitability. 

  Certain of the Company's technology development programs, including the 
Company's selection, screening and predictive technology programs (conducted 
through NaviCyte), may not result in products or services that can be 
utilized, other than for certain limited development consortium purposes, 
within the foreseeable future, if ever.  There can be no assurances that 
these programs will be successfully completed or result in products or 
services that are efficacious, perceived as valuable by pharmaceutical 
partners or customers, useful in the Company's internal development programs 
or otherwise an enhancement to the Company's ability to engage effectively in 
drug discovery.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

  The continued development of the Company's technologies and compounds will 
require the commitment of substantial additional funds to maintain the 
competitiveness of its combinatorial chemistry technologies, to continue its 
technology development programs (including the Company's selection, screening 
and predictive technology programs (conducted through NaviCyte) and the 
Company's efforts to synthesize compounds through automation) and to conduct 
the costly and time consuming research and preclinical and clinical testing 
necessary to advance potential drug candidates (such as HP 228).  The 
Company's future capital requirements will depend on many factors, including, 
among others, (i) continued scientific progress in its research and 
development programs, (ii) the ability of the Company to establish and 
maintain collaborative arrangements with respect to the Company's drug 
discovery technologies and the clinical testing of candidate products, (iii) 
progress with preclinical and clinical trials, (iv) the costs involved in 
further developing and sustaining internal combinatorial chemistry and other 
drug discovery capabilities, (v) the costs involved in developing additional 
drug discovery technologies (including the Company's selection, screening and 
predictive technology programs (conducted through NaviCyte) and the Company's 
efforts to synthesize compounds through automation), (vi) the costs involved 
in preparing, filing, prosecuting, maintaining and enforcing patent claims, 
(vii) competing technological and market developments and (viii) changes in 
the Company's existing research relationships.  Although the Company 
estimates that its existing capital resources and funding under existing 
research and development collaborations and product sales agreements, 
together with currently available property and equipment financing, will be 
sufficient to fund its current and planned operations for the next 12 months, 
there can be no assurance that changes will not occur that would consume 
available capital resources before such time.

  The Company anticipates that it will be required to raise additional capital
over a period of several years in order to conduct its operations.  Such capital
may be raised through additional public or private financings, as well as
collaborative arrangements, borrowings and other available sources.  There can
be no assurance that additional financing will be available on acceptable terms,
if at all.  If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs, which could have a material adverse effect on the Company.

COMPETITION

  The Company is engaged in a highly competitive and rapidly changing industry. 
The Company competes not only with other combinatorial chemistry companies, but
also with companies utilizing other technologies (such as high or ultrahigh
throughput screening) for the same objectives.  Competition from fully
integrated pharmaceutical companies, biotechnology companies and other drug
discovery companies is intense and is expected to increase.  Many pharmaceutical
and biotechnology companies, which represent the largest potential market for
the Company's combinatorial chemistry and other drug discovery technologies,
have developed or are developing internal combinatorial chemistry and other drug
discovery technology programs (including selection, screening and predictive
technologies) or have entered into collaborations with companies conducting such
programs.  Many of these pharmaceutical companies, as compared with the Company,
have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical and clinical testing, obtaining
regulatory approvals and marketing.  Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical and established biotechnology companies.  Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, seek patent protection and establish
collaborative arrangements for products and clinical development and marketing
which may be competitive with the Company's efforts.  These companies and
institutions compete with the Company in recruiting and retaining highly
qualified scientific and management personnel.  There is also competition for
access to novel pharmacophores and desirable assays to use for screening of
libraries, and any inability of the Company to develop novel pharmacophores or
maintain access to a sufficiently broad range of assays for screening potential
drugs would have a material adverse effect on the Company.  There can be no
assurance that the Company's competitors will not develop more effective or more
affordable technology or products, or achieve earlier product development and
commercialization than the Company, thus rendering the Company's technologies
and/or products obsolete, uncompetitive or uneconomical.  

  In combinatorial chemistry and other drug discovery technologies, the Company
faces competition based on a number of factors, including price, size and
diversity of libraries, ease of use of libraries, speed and costs of identifying
and optimizing potential lead compounds, access to novel pharmacophores and
desirable assays, patent position and the ability to provide drug discovery
technologies 

                                       10

<PAGE>

desired by or useful to potential partners.  In view of the competitive 
nature of the Company's industry, the Company expects to face continued and 
substantial downward pressure on the prices which the Company is able to 
charge for its products and services.

  In addition, products and therapies that will compete directly with any
compounds that the Company seeks to develop (such as HP 228), or that the
Company's collaborative partners may seek to develop, currently exist or are
being developed.  In product development and marketing, the Company and its
collaborative partners will face competition based on product efficacy and
safety, the timing and scope of regulatory approvals, availability of supply,
marketing and sales capability, reimbursement coverage, price and patent
position.
  
PATENTS AND PROPRIETARY TECHNOLOGY

  The Company's success will depend in large part on its ability to obtain
patents for its methodologies and the compounds and other products, if any,
resulting from the application of such methodologies, defend patents once
obtained, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the U.S. and in foreign countries.  The
patent positions of pharmaceutical and biotechnology companies, and companies
utilizing drug discovery technologies such as combinatorial chemistry (including
the Company), are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved.  There can be no
assurance that the Company will develop or obtain the rights to products or
processes that are patentable, that patents will issue from any of the pending
applications or that claims allowed will be sufficient to protect the Company's
technologies or products.  Pending patent applications for which rights are
uncertain include applications being prosecuted by the Company with respect to
the Company's combinatorial chemistry libraries and certain uses for HP 228, as
well as patent applications filed by the Company (through NaviCyte) with respect
to certain aspects of the selection, screening and predictive technology
programs being developed by the Company (through NaviCyte).  There can be no
assurance that the patents of, or with respect to which rights have been
licensed to, the Company will not be challenged, invalidated or circumvented, or
that the rights granted or licensed to the Company will provide proprietary
protection or competitive advantages to the Company.  Such patents include a
U.S. patent for the Tea Bag technology, which is licensed to the Company, and
the Company's U.S. patent for the composition of matter of HP 228 and certain
uses of HP 228.  The U.S. patent on the Tea Bag technology, that the Company
believes is important to the Company's business, expires in 2003.  Competitors
(some of which have, or are affiliated with companies having, substantially
greater resources than the Company) may have filed applications, may have been
issued patents or may obtain additional patents and proprietary rights to or the
use of certain methodologies relating to products or processes competitive with
those of the Company or which could block the Company's efforts to obtain
patents or conduct its business.

  A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received patents in
the fields of combinatorial chemistry and other drug discovery technologies and
with respect to products and therapies that may have potential uses which are
similar to the Company's current research and development areas.  The commercial
success of the Company will depend in part on the Company's not infringing
patents and not breaching the patent and know-how licenses upon which any of the
Company's technologies or compounds are based or having such licenses breached
or terminated by others.  Certain patent applications or patents may conflict
with the Company's patent applications and patents either by claiming the same
methods or compounds or by claiming methods or compounds which would dominate
those of the Company.  A U.S. patent application is maintained under conditions
of confidentiality while the application is pending in the U.S. Patent and
Trademark Office ("PTO") so that the Company cannot determine the inventions
being claimed in pending patent applications filed by its competitors in the
PTO.  Any such conflicts could result in a significant reduction of the coverage
of the Company's issued or licensed patents and its ability to obtain issuance
of significant patent protection from its applications.  In addition, if patents
are issued to other companies which contain competitive or conflicting claims,
the Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology.  If any license is required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable terms, if at all.  If such licenses are not obtained, the
Company could be prevented from pursuing the development or commercialization of
its technologies or potential products.  The Company's breach of an existing
license or failure to obtain a license to any technology that it may require to
commercialize its technologies or its potential products may have a material
adverse impact on the Company.

  Litigation, which could result in substantial costs to the Company, may also
be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third party proprietary rights.  There can
be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction or that an alleged infringer would be
found to be infringing.  Further, with respect to certain technology in-licensed
by the Company, the Company does not have the right to control any litigation
with respect to such technology.  An adverse outcome could subject the Company
to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company. 
Moreover, merely the uncertainties resulting from institution and continuation
of any technology-related litigation could have a material adverse effect on the
Company's ability to compete in the marketplace pending resolution of the
disputed matters.  If competitors of the Company prepare and file patent
applications in the U.S. that claim technology also claimed by the Company, the
Company may have to participate in interference proceedings declared by the PTO
to determine the priority of the invention, which could result in substantial
cost to the Company, even if the outcome is favorable to the Company.  An
adverse outcome could subject the Company to significant liabilities to third
parties and require the Company to license disputed rights from third parties or
discontinue using the technology.

                                       11

<PAGE>

  The Company also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable.  The
Company attempts to protect its proprietary technology and processes in part
through confidentiality agreements with its employees, consultants and certain
contractors.  There can be no assurance, however, that these agreements will not
be breached or terminated, that the Company would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors.  The Company, as well as its
consultants and research collaborators in their work for the Company, use
intellectual property owned by others. Disputes may arise as to the rights in
technology resulting from collaborations and in the related know-how and
inventions. The Company relies on certain technologies to which it does not have
exclusive rights or which may not be patentable or proprietary and thus may be
available to competitors.

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; IRREGULAR
REVENUE FLOW

  The Company has experienced significant operating losses since inception.  For
the years ended December 31, 1998, 1997 and 1996, the Company had net losses of
approximately $12,801,000, $9,372,000 and $11,688,000, respectively.  As of
December 31, 1998, the Company had an accumulated deficit of approximately
$68,430,000.

  The Company expects that its ability to achieve profitability will be partly
dependent upon the ability of the Company to enter into and achieve success
under additional collaborative arrangements or to expand and achieve success
under existing relationships.  There can be no assurance that the Company will
be successful in entering into additional collaboration arrangements that will
result in revenues or that the Company will receive additional revenues under
existing collaboration arrangements.  If the Company is unable to receive
significant additional revenues under collaboration arrangements, the Company
expects to incur additional operating losses in the future and expects
cumulative losses to increase as the Company's research and development efforts
and preclinical and clinical testing are expanded.  Any revenues from the
achievement of milestones, royalties or license fees from the discovery,
development or sale of a commercial drug by a collaborator are not expected to
be material to the Company's financial position for several years, if at all. 
The Company is unable to predict when, if ever, it will become profitable.  

  As a result of factors affecting the Company's business (including the
importance to the Company of collaborative arrangements and the Company's
inability to control the actions, timing, funding or success of its current and
potential collaborative partners), the revenues of the Company may vary
substantially from period to period.  Thus, the Company's results for any one
period may not be indicative of the results which can be expected for any other
period.

CLINICAL DEVELOPMENT OF HP 228

  To date, the Company has itself developed one drug candidate (HP 228) that has
entered the early stages of human clinical testing.  Even though HP 228 has
demonstrated indications of efficacy in preclinical models and the results of
certain Phase I and II studies have shown no significant safety concerns, there
can be no assurance that HP 228 will be demonstrated to be effective in treating
human diseases or safe in further trials.  Lack of progress, adverse results or
discontinuation of the HP 228 clinical programs could have a material adverse
effect on the Company.  HP 228 is not expected to be commercially available for
a number of years, if ever, even if it is successfully developed and proven to
be safe and effective.

NAVICYTE'S PRODUCTS AND SERVICES

  The Company presently receives a limited amount of revenues from the sale 
by NaviCyte of non-exclusive Caco-2 cell licenses, products (i.e., Caco-2 
cells and diffusion chambers) and services (i.e., contract testing) by 
NaviCyte.  Although the Company believes that the Caco-2 cell line is 
currently the most widely used cell line for in-vitro estimation of the oral 
absorption of compounds, there can be no assurances that third parties will 
continue to use such cells or seek to license related rights or acquire 
Caco-2 cells or any derivatives from NaviCyte. Furthermore, the Company is 
aware that third parties are claiming the right to use Caco-2 cells without a 
license from NaviCyte.  Such circumstances may require the Company to enforce 
its rights through litigation.  Furthermore, although NaviCyte is working to 
develop selection, screening and predictive technologies that, if 
successfully developed, may be valuable to potential partners, there can be 
no assurances that the business of NaviCyte will ever achieve or sustain a 
meaningful level of revenues.

GOVERNMENT REGULATION

  The manufacturing and marketing of any products developed by the Company or
its collaborators will be subject to regulation for safety and efficacy by
governmental authorities in the U.S. and other countries.  In the U.S.,
pharmaceuticals are subject to rigorous regulation by the Food and Drug
Administration ("FDA").  The Federal Food, Drug and Cosmetic Act and the Public
Health Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of pharmaceutical

                                       12

<PAGE>

products.  Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.

  The steps required before a pharmaceutical agent may be marketed in 
the U.S. include (i) preclinical laboratory and animal tests, (ii) 
submission to the FDA of an Investigational New Drug application 
("IND"), which must be deemed acceptable before human clinical trials 
may commence, (iii) adequate and well-controlled human clinical trials 
to establish the safety and efficacy of the drug, (iv) submission of a 
New Drug Application ("NDA") or Product License Application ("PLA") to 
the FDA and (v) FDA approval of the NDA or PLA prior to any commercial 
sale or shipment of the drug.  In addition to obtaining FDA approval 
for each product, each domestic drug manufacturing facility is subject 
to inspections every two years by the FDA and must comply with current 
Good Laboratory Practices and Good Manufacturing Practices ("GMP").  
To supply products for use in the U.S., foreign manufacturing 
facilities also must comply with GMP and are subject to periodic 
inspection by the FDA or by regulatory authorities in such countries 
under reciprocal agreements with the FDA.

  Preclinical tests include laboratory evaluation of product chemistry 
and animal studies to assess the safety and efficacy of the product 
and its formulation.  The results of the preclinical tests are 
submitted to the FDA as part of an IND and, unless the FDA objects, 
the Company submitting the IND may start clinical studies 30 days 
following its submission to the FDA.

  Clinical trials involve the administration of the pharmaceutical product to
volunteers or to patients identified as having the condition for which the
pharmaceutical is being tested.  The pharmaceutical is administered under the
supervision of a qualified principal investigator.  Clinical trials are
conducted in accordance with protocols previously submitted to the FDA as part
of the IND which detail the objectives of the study, the parameters used to
monitor safety and the efficacy criteria evaluated.  Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution at which the study is conducted.  The IRB considers,
among other things, ethical factors, the safety of the human subjects and the
possible liability risk for the institution.

  Clinical trials are typically conducted in three sequential phases that may
overlap.  Phase I consists of the initial introduction of the pharmaceutical
into human volunteers, and the emphasis is on testing for safety (adverse
effects), dosage tolerance, absorption, metabolism, distribution, excretion and
clinical pharmacology.  Phase II involves studies in a limited patient
population to determine the efficacy of the pharmaceutical for specific targeted
indications, to determine dosage tolerance, optimal dosage and dosing frequency,
and to identify possible adverse side effects and safety risks.  Once a compound
is found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to further evaluate both clinical
efficacy and safety within an expanded patient population at multiple clinical
study sites.  The FDA reviews both the clinical plans and results of the trials
and may order suspension of the trials at any time if there are significant
safety issues.

  Results of the preclinical and clinical trials are submitted to the FDA in the
form of an NDA or PLA for marketing approval.  The testing and approval process
is likely to require substantial time and effort, and there can be no assurance
that any approval will be granted on a timely basis, if at all.  The approval
process is affected by a number of factors, including severity of the disease,
availability of alternative treatments, and risks and benefits demonstrated in
clinical trials.  Additional animal studies or clinical trials may be requested
during the FDA review process and may delay marketing approval.  After FDA
approval for the initial indications, further clinical trials are necessary to
gain approval for use of the product for any additional indications.  The FDA
may also require post-marketing testing to monitor for adverse effects, which
can involve significant expense.  Failure to comply with applicable regulatory
requirements after obtaining regulatory approval can, among other things, result
in the suspension of regulatory approval, as well as possible civil and criminal
sanctions.  In addition, changes in regulations could have a material adverse
effect on this industry.

  For marketing outside the U.S., the Company's collaborators and the Company
will also be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products.  The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.

  With respect to any potential products that enter clinical trials (such as 
HP 228), there can be no assurance that the Company or its collaborators will 
be permitted to continue or undertake new human clinical testing of such 
potential products, or, if permitted, that such potential products will be 
demonstrated to be safe and efficacious.  The lead compounds of the Company 
or its collaborators may prove to have undesirable and unintended side 
effects or other characteristics that may prevent or limit their commercial 
use.  In addition, there can be no assurance that any of the potential 
products of the Company or its collaborators will ultimately obtain FDA or 
foreign marketing approval for any indication, that an approved compound will 
be capable of being produced in commercial quantities at reasonable cost or 
that any such compound will be successfully marketed. Furthermore, even if 
approval is ultimately obtained, delays in the approval process could have a 
material adverse effect on the Company.

  In addition to regulations enforced by the FDA, the Company is also subject 
to other regulation, including regulation under the Occupational Safety and 
Health Act, the Environmental Protection Act, the Toxic Substances Control 
Act, the Resource Conservation and Recovery Act, regulations promulgated by 
the United States Department of Agriculture, and other federal, state and 
local laws and regulations.

                                       13

<PAGE>

MANAGEMENT

  The Company has multiple collaborative arrangements and drug development 
technologies, and the Company desires to enter into additional collaborative 
relationships and to further develop and expand its drug discovery 
capabilities. The Company's success will depend upon the effective management 
of these current and prospective collaborative relationships and drug 
development technologies and capabilities, including maintaining 
confidentiality of the research being provided for collaborators as well as 
the maintenance and further development of the Company's technologies and 
progress in the Company's research and development programs.  To further 
develop its technologies (including combinatorial chemistry, automated 
compound synthesis and the Company's selection, screening and predictive 
technology programs conducted through NaviCyte), and to pursue its product 
development plans, the Company will be required to hire additional qualified 
scientific personnel to perform research and development, as well as 
personnel with expertise in clinical testing and government regulation.  
These requirements, as well as the management of current and prospective 
collaborative arrangements, are expected to demand the addition of management 
personnel and the development of additional expertise by existing management 
personnel.  The Company faces intense competition for qualified individuals 
from numerous pharmaceutical and biotechnology companies, universities and 
other research institutions.

MANUFACTURING

  The Company has no manufacturing facilities for its pharmaceutical products 
or certain products offered by NaviCyte (such as diffusion chambers) and will 
need to rely on contract manufacturers to produce these items (including any 
compounds for clinical trials and commercialization).  The Company's products 
under development have never been manufactured on a commercial scale and 
there can be no assurance that such products can be manufactured at a cost or 
in quantities necessary to make them commercially viable.  If the Company 
were unable to produce internally or to contract for a sufficient supply of 
its pharmaceutical products on acceptable terms, or if it should encounter 
delays or difficulties in its relationships with manufacturers, the Company's 
human clinical testing schedule would be delayed, resulting in delay in the 
submission of products for regulatory approval and the market introduction 
and subsequent sales of such products, which could have a material adverse 
effect on the Company.  Moreover, contract manufacturers that the Company may 
use must adhere to GMP regulations enforced by the FDA through its facilities 
inspection program.  If these facilities cannot pass a pre-approval plant 
inspection, the FDA pre-market approval of the products will not be granted.

RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE

  The Company's business will expose it to potential product liability risks 
that are inherent in the testing, manufacturing and marketing of human 
therapeutic products and other facets of the drug development process.  The 
Company does have product liability insurance, but there can be no assurance 
that the Company will be able to maintain such insurance on acceptable terms 
or that this insurance will provide adequate coverage against potential 
liabilities.  The Company also has clinical trial liability insurance, but 
there can be no assurance that the Company will be able to maintain such 
insurance for any of its clinical trials or that such insurance will provide 
adequate coverage against potential liabilities.

POTENTIAL LIABILITY REGARDING HAZARDOUS MATERIALS

  The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds.  The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products.  The risk of accidental contamination or injury from
these materials cannot be completely eliminated.  In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.  In addition, there
can be no assurance that the Company will not be required to incur significant
costs to comply with environmental laws and regulations in the future.

                                       14

<PAGE>

POSSIBLE VOLATILITY OF STOCK PRICE

  The market prices for securities of life sciences companies have been 
highly volatile and the market has experienced significant price and volume 
fluctuations, some of which are unrelated to the operating performance of 
particular companies.  Announcements of technological innovations or new 
commercial products or failures of potential products by the Company, its 
collaborators or its competitors, developments in the Company's relationships 
with current or future collaborative partners, developments concerning 
proprietary rights, including patents and litigation matters, publicity 
regarding actual or potential results with respect to compounds under 
development by the Company or its collaborators, regulatory developments in 
both the U.S. and foreign countries, public concern as to the efficacy of 
combinatorial chemistry or other new drug discovery technologies, changes in 
reimbursement policies, general market conditions, as well as quarterly 
fluctuations in the Company's revenues and financial results and other 
factors, may have a significant impact on the market price of the Company's 
Common Stock. In particular, the realization of any of the risks described in 
these "Risk Factors" may have a material adverse impact on such market price.

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW

  The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power and other rights of the holders of the Company's Common Stock. 
Although the Company has no current plans to issue any shares of preferred
stock, the issuance of preferred stock or of rights to purchase preferred stock
could be used to discourage an unsolicited acquisition proposal.  In addition,
the possible issuance of preferred stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock.  The Company's Certificate of
Incorporation provides for staggered terms for the members of the Board of
Directors.  A staggered Board of Directors and certain provisions of the
Company's by-laws and Certificate of Incorporation and of Delaware law
applicable to the Company could delay or make more difficult a merger, tender
offer or proxy contest involving the Company.  In addition, the Company is
subject to Section 203 of the General Corporate Law of Delaware which, subject
to certain exceptions, restricts certain transactions and business combinations
between a corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock (an "interested stockholder") for a period of three
years from the date the stockholder becomes an interested stockholder.  These
provisions, and certain other provisions of the Certificate of Incorporation and
the Company's by-laws, may have the effect of delaying or preventing a change of
control of the Company without action by the stockholders and, therefore, could
adversely affect the price of the Company's Common Stock.

UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM

  The Company expects that significantly all of its revenues in the foreseeable
future will be derived from services and compounds provided to the
pharmaceutical and biotechnology industries.  Accordingly, the Company's success
in the foreseeable future is directly dependent upon the success of the
companies within those industries and their continued demand for the Company's
services and compounds.  The levels of revenues and profitability of
pharmaceutical companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means and the initiatives of third party payors with
respect to the availability of reimbursement.  For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
governmental control. In the U.S., there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control.  It is uncertain what legislative proposals may be
adopted or what actions federal, state or private payors for health care goods
and services may take in response to any health care reform proposals or
legislation.  To the extent that such proposals or reforms have a material
adverse effect on the business, financial condition and profitability of
pharmaceutical or biotechnology companies that are actual or prospective
collaborators for the Company's services or potential products, the Company's
market value, access to financing, business, financial condition and results of
operations could be materially and adversely affected.
  

ITEM 2.  PROPERTIES
  
  The Company currently leases a facility of 71,625 square feet (approximately
55,000 square feet of laboratory and office space) located at 9880 Campus Point
Drive, San Diego, California.  The lease term extends until May 1, 2008.
  
ITEM 3.  LEGAL PROCEEDINGS

  The Company is not a party to any legal proceedings at this time.

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

                                       15

<PAGE>

  No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1998.
  
      EXECUTIVE OFFICERS OF THE REGISTRANT
      
       The information set forth at Item 10(b) below is incorporated herein by
reference.

                                       16

<PAGE>

                                      PART II

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

  The Company's Common Stock is traded on the over-the-counter market (the
Nasdaq National Market) under the symbol "TRGA". The following table sets forth
the high and low sale prices for the Company's Common Stock as reported on the
Nasdaq National Market for the periods indicated. These prices reflect
interdealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>


            1997                                        High       Low
            ----                                      --------   ---------
            <S>                                       <C>        <C>
            First Quarter.........................    $ 8 1/4    $  5
            Second Quarter........................      6 3/4       3 3/8
            Third Quarter.........................      6 1/4       3 1/2
            Fourth Quarter........................      5 1/2       2 5/8

            1998                                        High       Low
            -----                                     --------   ---------
            First Quarter.........................    $ 5 1/4    $  2 13/16
            Second Quarter........................      6           2 7/8
            Third Quarter.........................      4 1/2       1 3/16
            Fourth Quarter........................      3 1/4       1 3/8

             1999                                       High       Low
             -----                                    --------   ---------
             First Quarter (through March 12, 1999)   $ 4        $  1 3/4


</TABLE>

  There were approximately 179 holders of record of the Company's Common Stock
as of March 12, 1999. The Company has not paid any cash dividends to date on its
Common Stock and does not anticipate any being paid in the foreseeable future.
  
Exempt Sales of Securities

  On November 9, 1998, Trega sold 1,866,667 shares of the Company's Common 
Stock to Novartis Pharma AG ("Novartis") for an aggregate purchase price of 
$7 million.  The sale occurred pursuant to arrangements entered into in 
connection with a Research, Development and License Agreement between the 
Company and Novartis (see "Trega's Collaborations--Novartis" in item 1 
above).  The sale of such Common Stock was deemed to be exempt from 
registration under the Securities Act of 1933, as amended (the "1933 Act"), 
by virtue of Section 4(2) thereof and Rule 506 of Regulation D thereunder 
("Rule 506") as a transaction not involving any public offering.  An 
appropriate filing on Form D was made, Novartis represented its intention to 
acquire the shares for investment only and not with a view to the 
distribution thereof, an appropriate legend was affixed to the certificate 
representing the securities and Novartis had adequate access to information 
about the Company.

  On November 12, 1998, the Company, TBNC Acquisition Corporation, a Delaware 
corporation and a wholly-owned subsidiary of the Company ("Acquisition 
Corporation"), NaviCyte, Inc. ("NaviCyte"), George M. Grass, Ph.D. and 
Patrick J. Sinko, Ph.D. entered into an Agreement and Plan of Reorganization 
(the "Merger Agreement") providing for the merger of Acquisition Corporation 
with and into NaviCyte (the "Merger"), with NaviCyte being the surviving 
corporation.  On November 23, 1998, the Merger was consummated with the 
filing of a Certificate of Merger in Delaware.  As a result of the Merger, 
the following took place: (i) Trega acquired all of the outstanding shares of 
NaviCyte capital stock; (ii) the holder of NaviCyte's issued and outstanding 
capital stock prior to the Merger (Dr. Grass) received, in the aggregate, 
$210,000 in cash and 1,428,231 shares of the Company's Common Stock; and 
(iii) holders of options to acquire NaviCyte capital stock prior to the 
Merger received, in the aggregate, options to acquire 1,071,756 shares of the 
Company's Common Stock (subject to vesting).  The amount of cash paid and the 
number of shares of the Company's Common Stock issued as a result of the 
Merger were determined by negotiation between Trega and NaviCyte. The 
issuance of shares of the Company's Common Stock in connection with the 
Merger was not registered under the 1933 Act by virtue of Section 4(2) 
thereof and Rule 506 as a transaction not involving any public offering.  The 
Merger entailed the issuance of shares of the Company's Common Stock to one 
person who was deemed to be either an "accredited" investor (as defined in 
Regulation D under the 1933 Act) or sufficiently sophisticated for purposes 
of Rule 506.  An appropriate filing on Form D was made, the recipient of the 
Company's Common Stock in the Merger represented his intention to acquire the 
shares for investment only and not with a view to the distribution thereof, 
an appropriate legend was affixed to the certificate representing the 
Company's Common Stock and the recipient was provided with appropriate 
information about the Merger and the Company.

                                       17

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

  The data presented below should be read in conjunction with "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company (and the
notes thereto) contained elsewhere herein.

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                  -----------------------------------------------------------------
                                                     1998         1997(1)        1996         1995 (1)     1994(1)
                                                  -----------   -----------  -----------    ----------    ---------
<S>                                               <C>            <C>         <C>            <C>           <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                       (in thousands, except net loss per share)
Revenues:
  Contract research and license fees .........    $  6,799      $  7,334      $  5,750      $    293      $    315
  Related party contract research ............       3,970            --            --            --            --
                                                  --------      --------      --------      --------      --------
  Net sales ..................................          21           430         2,507         1,077           315
                                                  --------      --------      --------      --------      --------
          Total revenues .....................      10,790         7,764         8,257         1,370           630
Costs and expenses:
  Cost of sales ..............................           7           341         2,025         1,313           249
  Research and development ...................      17,934        14,819        11,781         7,289         6,524
  Acquired in-process research and development       1,000            --         2,585            --            --
  Selling, general and administrative ........       5,181         4,346         4,191         2,722         2,319
                                                  --------      --------      --------      --------      --------
          Total costs and expenses ...........      24,122        19,506        20,582        11,324         9,092
                                                  --------      --------      --------      --------      --------
Loss from operations .........................     (13,332)      (11,742)      (12,325)       (9,954)       (8,462)
Other income (expense):
  Net interest income and other ..............         531         1,115           637            50           (33)
  Gain on sale of MPS ........................          --         1,255            --            --            --
 Corporate joint venture .....................          --            --            --           414          (557)
                                                  --------      --------      --------      --------      --------
Net loss .....................................    $(12,801)     $ (9,372)     $(11,688)     $ (9,490)     $ (9,052)
                                                  --------      --------      --------      --------      --------
                                                  --------      --------      --------      --------      --------
Basic and diluted net loss per share(2) ......    $   (.89)     $   (.69)     $  (1.17)     $ (33.53)     $ (33.90)
                                                  --------      --------      --------      --------      --------
                                                  --------      --------      --------      --------      --------
Shares used in computing basic and diluted
  net loss per share(2) ......................      14,380        13,603         9,956           283           267
                                                  --------      --------      --------      --------      --------
                                                  --------      --------      --------      --------      --------

<CAPTION>
                                                                       DECEMBER 31,
                                                  --------------------------------------------------------------
                                                     1998         1997          1996          1995        1994
                                                  ---------     ---------    ---------      -------     --------
<S>                                               <C>           <C>          <C>            <C>         <C>
CONSOLIDATED BALANCE SHEETS DATA:                                     (in thousands)
Cash, cash equivalents and short-term investments.. $  16,262   $  19,427     $ 27,443     $  1,161       $   516
Working capital....................................     8,057      12,791       22,482       (2,345)         (721)
Total assets.......................................    29,535      25,119       30,513        2,746         1,882
Notes payable and obligations under capital
  leases, less current portion.....................     2,689       1,589          633          470           647
Series One Redeemable Preferred Stock..............        --          --           --        2,772         2,604
Accumulated deficit................................   (68,430)    (55,629)     (46,257)     (34,522)      (24,865)
Total stockholders' equity (deficit)...............    17,640      16,218       24,156       (4,375)       (2,799)

</TABLE>

----------
(1)  The 1994 and a portion of the 1995 results do not 
     include revenues from the Company's former subsidiary, MPS, as 
     substantially all of MPS's assets were transferred to a separate 
     entity, Chiron Mimotopes Peptide Systems, LLC, as of January 1, 1994; 
     however, the separate entity was dissolved and certain assets were 
     transferred to MPS beginning April 1, 1995. The 1997 results reflect 
     MPS operations through February 1997 after which time MPS was sold. 
     See "Item 7 - Management's Discussion and Analysis of Financial 
     Condition and Results of Operations" below.

(2)  See Note 1 of Notes to Consolidated Financial Statements for information
     concerning the computation of basic and diluted net loss per share.

                                       18

<PAGE>

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

  EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL," "EXPECTS,"
"BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND SIMILAR
EXPRESSIONS). THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW AND IN ITEM 1 OF THIS ANNUAL
REPORT ON FORM 10-K UNDER THE CAPTION "RISK FACTORS," THAT COULD CAUSE ACTUAL
RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY EXPRESSLY DISCLAIMS ANY
OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE
COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS
OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.

  THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "ITEM 6 - SELECTED
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY (AND
NOTES THERETO) CONTAINED ELSEWHERE HEREIN.

OVERVIEW
  
  Trega Biosciences, Inc. (the "Company" or "Trega") is a drug discovery company
focused on accelerating the process of drug discovery by using small molecule
combinatorial chemistry and other drug discovery technologies to create novel
drugs having greater chances of clinical success. In combination with its wholly
owned subsidiary, NaviCyte, Inc. ("NaviCyte"), Trega offers products and
services to the pharmaceutical and biopharmaceutical industries. Trega also uses
its drug discovery technologies in its internal development programs, which are
focused on discovering small molecules acting on melanocortin receptors, which
may be important in the treatment of inflammatory and metabolic diseases.
  
  In November 1998, the Company acquired NaviCyte, a privately-held company
engaged in (i) the sale of devices and licensing of a cell line used in
connection with predictive testing of drug candidates for absorption
characteristics and (ii) the development of a range of drug candidate selection
tools intended to be used to predict the pharmacokinetic characteristics of drug
candidates.

  In March 1999, the Company sold substantially all of the assets of ChromaXome
Corp. ("ChromaXome"), its wholly-owned subsidiary, which focused on the
development and use of combinatorial biology techniques to create drug
candidates and other molecules of commercial interest from naturally occurring
microbial sources.

  While at the time of these transactions the respective sizes of the 
workforces of NaviCyte and ChromaXome were comparable, the Company 
anticipates an increase in costs at NaviCyte over those at ChromaXome as 
development costs related to NaviCyte's products and services under 
development are incurred.  It can be anticipated, in addition, that the 
development of NaviCyte's products and services will necessitate the hiring 
of additional employees, although their number has not yet been ascertained.  
It is further anticipated that revenues from the sale of products and 
services by NaviCyte will offset, in part, these increased costs.
  
  The Company leverages its technology platform by entering into pharmaceutical
alliances, providing partners access to the Company's technologies in exchange
for licensing fees and potential milestone payments and royalties. The timing
and amounts of revenues from such alliances, if any, are subject to significant
fluctuations and therefore the Company's results of operations for any period
may not be comparable to the results of operations for any other period and may
not be indicative of future operating results.  The Company will be required to
conduct significant research, development and production activities during the
next several years to fulfill its obligations to corporate partners and for the
development of its own compounds.  The Company has been unprofitable since its
inception and the Company is unable to predict when, if ever, it will become
profitable. As of December 31, 1998, the Company's accumulated deficit was
approximately $68,430,000.

                                       19
<PAGE>

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 

1998 COMPARED TO 1997 

  The Company recorded revenues of approximately $10.8 million in 1998 as
compared to approximately $7.8 million in 1997. Revenues for 1998 consist
primarily of approximately $10 million derived from research conducted under
collaborative research agreements and shipments of combinatorial libraries or
individual compounds as well as $750,000 derived from licensing payments. 
Revenues for 1997 include approximately $7.3 million derived from research
conducted under collaborative research agreements and shipments of combinatorial
libraries or individual compounds. In addition, net sales of custom peptides and
combinatorial peptide libraries by the Company's former subsidiary, Multiple
Peptide Systems, Inc. ("MPS"), accounted for approximately $430,000 of the total
revenues for 1997.  MPS was sold on February 28, 1997.  The revenue increase in
1998 as compared to 1997 was due to increased revenues under collaborative
research agreements offset, in part, by a decrease in shipments of combinatorial
libraries or individual compounds.  See Note 4 to the Company's Consolidated
Financial Statements.
  
  Cost of sales in 1998 is related to device sales from the Company's
subsidiary, Navicyte, acquired in November 1998.  In prior years, cost of sales
resulted primarily from sales made by MPS. 
  
  The Company's research and development costs totaled $17.9 million for 1998 as
compared to $14.8 million for 1997.  The increase of 21% is due to additional
research and development costs associated with the Company's partnered drug
discovery and melanocortin programs.  Additionally, the Company recorded an
expense related to in-process research and development of $1 million in 1998 in
connection with the acquisition of Navicyte. See Note 3 to the Company's
Consolidated Financial Statements.
     
  Selling and administrative expenses totaled $5.2 million in 1998 as compared
to $4.3 million in 1997.  This increase of 19% was due primarily to higher
headcount as well as costs associated with the Company's newly leased facility.
  
  Net interest income and other for 1998 totaled $531,000 as compared to 
$1,115,000 in 1997. This decrease was the result of lower interest income due 
to lower average cash and short-term investment balances and higher interest 
expense associated with equipment financing obligations. This was somewhat 
offset by a 1997 loss on investments related to the sale of stock received by 
the Company's former subisidary, MPS, in 1996.
  
  In 1997, the Company recorded a gain of approximately $1.3 million in
connection with the sale of MPS on February 28, 1997. 
  
  No tax benefit has been recognized for 1998 or 1997, as the utilization of
these operating losses is uncertain.  As of December 31, 1998, the Company had
federal and state operating loss carryforwards of approximately $53.4 million
and $7.2 million, respectively.  Realization of future tax benefits from
utilization of net operating loss carryforwards is uncertain. See Note 12 to the
Company's Consolidated Financial Statements.
  
1997 COMPARED TO 1996
 
  The Company recorded revenues of approximately $7.8 million in 1997 as 
compared to $8.3 million in 1996. Revenues for 1997 consist primarily of $7.3 
million derived from research conducted under collaborative research 
agreements and shipments of combinatorial libraries or individual compounds.  
Revenues for 1996 include $2.4 million from research conducted under 
collaborative research agreements and $3.4 million in stock received by the 
Company's former subsidiary, MPS, recognized as contract research revenues, 
as well as $2.5 million in sales of custom peptides and combinatorial peptide 
libraries by MPS.  Although revenues under collaborative research agreements 
increased during the year, overall revenues decreased in 1997 as compared to 
1996 due primarily to the sale of MPS in February 1997.  

  Cost of sales in 1997 and 1996 resulted from sales made by MPS and reflect
primarily the decrease in sales due to the sale of MPS noted above.
  
  The Company's research and development costs totaled $14.8 million for 1997 as
compared to $11.8 million for 1996.  The increase of 26% is due to additional
research and development costs associated with increased funding for (i) the
Company's combinatorial chemistry program, (ii) the Company's automation and
robotics synthesis program, (iii) the Company's melanocortin program, and (iv)
the Company's combinatorial biology technology program. Additionally, the
Company recorded an expense of approximately $2.6 million in 1996 in connection
with the acquisition of ChromaXome related to in-process research and
development. See Note 5 to the Company's Consolidated Financial Statements.

                                       20

<PAGE>

  Selling and administrative expenses increased 4% to $4.3 million in 1997 as
compared to $4.2 million in 1996.  This increase was primarily due to higher
legal costs as well as costs associated with being a public company.  
  
  During 1997, net interest income and other increased to $1,115,000 from 
$637,000 in 1996. This increase was attributed to interest income from higher 
average cash and short-term investment balances offset by a loss on 
investment related to the sale of stock received by MPS in 1996.

  In 1997, the Company  recorded a gain of approximately $1.3 million in
connection with the sale of MPS on February 28, 1997.
  
  No tax benefit has been recognized for 1997 or 1996 as the utilization of
these operating losses is uncertain.  As of December 31, 1997, the Company had
federal and state operating loss carryforwards of approximately $45.1 million
and $9.5 million, respectively.  Realization of future tax benefits from
utilization of net operating loss carryforwards is uncertain. See Note 12 to the
Company's Consolidated Financial Statements.
  
LIQUIDITY AND CAPITAL RESOURCES

  Since its inception through December 31, 1998, the Company has financed its
activities primarily from public and private sales of equity, funding from
collaborations with corporate partners, sales derived from shipments of
combinatorial libraries or individual compounds, sales of custom peptides and
combinatorial peptide libraries by MPS and interest income.  At December 31,
1998, the Company had cash, cash equivalents and marketable securities
aggregating $16.3 million compared to $19.4 million on December 31, 1997.  The
Company's working capital at December 31, 1998 was $8.1 million compared to
$12.8 million at December 31, 1997.  The Company has invested a significant
portion of its excess funds in cash equivalents and short-term investments
primarily of highly-rated debt instruments of financial institutions and
corporations.  See Item 7a, Qualitative and Quantitative Disclosure About Market
Risk.

  The decrease in cash, cash equivalents and marketable securities, at December
31, 1998, resulted primarily from $7.3 million used to fund operating
activities, $2.8 million invested in property and equipment, and $2.2 million
repaid on debt from property and equipment financing agreements.  The decrease
was offset, in part, by proceeds from the issuance of $7 million of common stock
to Novartis Pharma AG ("Novartis"), and proceeds from property and equipment
financing agreements of $2.5 million. See Notes 6 and 8 to the Company's
Consolidated Financial Statements.
  
  As of December 31, 1998, the Company had approximately $1.1 million available
under property and equipment financing agreements and may need to secure
additional property and equipment financing before the end of 1999 to fund
planned purchases.  Certain of the existing property and equipment financing
arrangements require the Company to provide a security deposit if cash, cash
equivalents and marketable securities fall below certain levels as defined in
the agreements.  
  
  During 1998, the Company moved into a combined research and development
facility and corporate headquarters in San Diego, California.  The ten-year
lease covering the facility calls for annual rent of approximately $1.7 million
and is subject to a 3.5% annual escalation clause. See Note 6 to the Company's
Consolidated Financial Statements.
     
  In connection with the Company's research agreement with Dura Pharmaceuticals
("Dura"), the Company is committed to fund $6,000,000 over four years in a drug
discovery and development collaboration using Dura's proprietary drug delivery
technology and Company compounds (such as HP 228).  As of December 31, 1998,
$4,650,000 had been funded since the inception of the 1996 Dura agreement.  See
Note 8 to the Company's Consolidated Financial Statements.

  The Company intends to use its financial resources primarily to fund research
and development, the expansion of its combinatorial library inventories and to
fund NaviCyte's operations.  The amounts actually expended for each purpose may
vary significantly depending on many factors.  These factors include the
continuation of its research and development programs, the acquisition or
initiation of new research and development programs, the costs involved in
filing, prosecuting and enforcing patents, competing technological and market
developments, and the scope and results of clinical trials.
  
  The Company anticipates that its existing capital resources and funding under
existing research and development collaborations and product sales agreements
(which provide for $7.1 million to be received in each 1999 and 2000), together
with currently available property and equipment financing, will be sufficient to
fund its current and planned operations for at least the next 12 months.   There
can be no assurances, however, that changes in the Company's research and
development plans or other changes affecting the Company's operating expenses
will not result in the expenditure of such resources before such time.
  
  The Company will need to raise substantial capital to fund its operations in
future periods.  The Company expects that its primary potential revenue sources
for the foreseeable future will be additional collaborative agreements, sales of
combinatorial libraries or 

                                       21

<PAGE>

compounds and revenues generated by the Company's wholly owned subsidiary, 
NaviCyte.  The Company intends to seek additional funding through additional 
research and development agreements with suitable corporate collaborators, 
extensions of existing corporate collaborations, and through public or 
private financings if available and consistent with the Company's business 
objectives.  There can be no assurances, however, that such collaboration 
arrangements, or public or private financings, will be available on 
acceptable terms, if at all.  If funds are raised through equity 
arrangements, further dilution to stockholders may result.  If adequate funds 
are not available, the Company may be required to delay, reduce the scope of, 
or eliminate one or more of its research and development programs or take 
other measures to cut costs, which could have a material adverse effect on 
the Company.
  
OTHER MATTERS

Impact of Year 2000

  Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field.  Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates.  As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.  

  In 1998, Trega Biosciences Inc. developed a three-phase program for Y2K
information systems compliance.  Phase 1 is to identify and solve Y2K issues in
the Company's significant information systems infrastructure and enterprise
business applications, including telecommunications and networking systems, as
well as accounting software.  Phase 2 is to identify and plan for Y2K issues
that are specific to the Company's business units, including local software,
product matters, facilities related systems and vendor concerns.  Phase 3 is
the final testing of each major area of exposure to ensure compliance, and the
development of contingency plans for unsolved Y2K deficiencies

  In Phase 1 of the program, the Company has inventoried and is in the process
of assessing company-wide systems, many of which have been identified as being
Y2K compliant.  Some systems software, hardware and firmware are in need of
upgrades.  These upgrades are available from third party suppliers, and are in
the process of being evaluated.  Systems which are not Y2K compliant are
currently being upgraded.  A plan for in-house testing has been developed and is
scheduled for completion by the end of the second quarter.

  Under Phase 2, the Company is currently identifying and evaluating exposure to
Y2K risk from third-party vendors.  The Company has developed a list of critical
vendors that are either sole-source suppliers or preferable suppliers.  The
Company is currently contacting significant third parties regarding their Y2K
readiness.  Preliminary findings indicate that only one such company's product
may have Y2K issues, and upgrades to this product are being addressed.  There is
another class of third party vendors, however, from which the Company cannot
obtain assurances with regard to the Y2K compliance of their systems.  For
example, the Company is dependent on electric, natural gas, water and telephone
utilities.  Similarly, the Company is dependent upon its banks, payroll
processor and insurers.  Disruption in one or more of the foregoing services
could have a material adverse impact on the Company.

  The testing and contingency plan development under Phase 3 began in early 1999
with completion expected in mid-1999.

  The anticipated costs relating to resolving Company Y2K issues are not 
currently believed to be significant (i.e., less than $100,000).  However, as 
additional Y2K remediation activities are developed and planned, there can be 
no guarantee that actual costs will not differ materially from those in the 
current estimate.  Specific factors that might cause such material 
differences include, but are not limited to, the availability and cost of 
personnel trained in this area, the completion of the Company's Y2K 
investigations (including matters relating to the Company's customers and 
vendors), the ability to locate and correct all relevant computer codes and 
similar uncertainties.  In addition, there can be no assurance that Y2K 
compliance problems will not be revealed in the future which could have a 
material adverse affect on the Company's business, financial condition and 
results of operation.  Many of the Company's customers and vendors may be 
affected by Y2K issues which may result in those customers having reduced 
funds to purchase the Company's products, or those suppliers experiencing 
difficulties in producing or shipping key components to the Company on a 
timely basis or at all.  Such third party issues could have a material 
adverse affect on the Company's business, financial condition and results of 
operations.

  THIS DISCUSSION OF THE COMPANY'S Y2K STATUS CONSTITUTES A "YEAR 2000 
READINESS DISCLOSURE" AS THAT ITEM IS DEFINED IN THE YEAR 2000 INFORMATION 
AND READINESS DISCLOSURE ACT.
  
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

  The Company is exposed to changes in interest rates primarily from its 
long-term debt arrangements and, secondarily, its investments in certain 
held-to-maturity securities.  The Company invests its excess cash in highly 
liquid short-term investments that are typically held for the duration of the 
term of the respective instrument.  The Company does not utilize derivative 
financial instruments, 

                                      22
<PAGE>

derivative commodity instruments or other market risk sensitive instruments, 
positions or transactions to manage exposure to interest rate changes.  
Accordingly, the Company believes that, while the securities the Company holds
are subject to changes in the financial standing of the issuer of such 
securities, the Company is not subject to any material risks arising from 
changes in interest rates, foreign currency exchange rates, commodity prices, 
equity prices or other market changes that affect market risk sensitive 
instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  Reference is made to the Company's Consolidated Financial Statements (and
notes thereto) and supplementary data required by this item and set forth at the
pages indicated in Item 14(a) of this Annual Report on Form 10-K.

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

     None.

                                      PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Identification of Directors.  The information under the caption "Election 
of Directors" appearing in the Proxy Statement to be filed on or about April 
16, 1999 is incorporated herein by reference.

(b) Identification of Executive Officers. 

EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company as of March 26, 1999 are as 
follows:

  MICHAEL G. GREY, age 46, has served as a Director of the Company since 
December 1998. As of January 1999, Mr. Grey also became the President and 
Chief Executive Officer of the Company.  Prior to joining the Company, Mr. 
Grey was the President of BioChem Pharma Inc. from November 1994 to August 
1998.  In that role, he was responsible for all company operations including 
research, development, sales and marketing, finance and human resources.  
During 1994, Mr. Grey was the President and Chief Operating Officer for 
Ansan, Inc.  From 1974 to 1993, Mr. Grey served in various roles with Glaxo 
Inc. and Glaxo Holdings, p.l.c., culminating in his position as Vice 
President, Corporate Development.  Mr. Grey serves on the Board of Directors 
of Cortex Pharmaceuticals, Inc.  Mr. Grey received a B.Sc. in Chemistry from 
the University of Nottingham, England.
  
  STEPHEN F. FLAIM, PH.D., age 50, has served as Vice President, Biological 
Research and Development since July 1998.  Prior to joining the Company, Dr. 
Flaim held positions from April 1990 to June 1998 with Alliance 
Pharmaceutical Corp., culminating with his position as Vice President, 
Biological Sciences. During his time at Alliance, Dr. Flaim led preclinical 
research and development activities on 4 products currently in clinical 
trials. From 1987 to 1990, Dr. Flaim held several positions at the Bristol 
Myers Squibb Institute for Medical Research culminating in Associate Director 
of Cardiovascular Pharmacology. From 1982 to 1987, Dr. Flaim held positions 
in Biological Sciences at McNeil Pharmaceutical, a Johnson & Johnson Company, 
culminating with his position as Research Fellow in Cardiovascular Research.  
From 1975 to 1982, Dr. Flaim was an Assistant Professor of Medicine and 
Physiology at the Pennsylvania State University College of Medicine at 
Hershey, Pennsylvania.  Dr. Flaim received his Ph.D. in Human Physiology and 
Pharmacology from the University of California, Davis.
  
  GEORGE M. GRASS, PHARM.D., PH.D., age 41, has served as President of 
NaviCyte, Inc., a wholly owned subsidiary of the Company since November 1998. 
 In addition to co-founding NaviCyte, Inc. in 1996 and serving as its Chief 
Executive Officer, Dr. Grass has also been serving as the President of 
Precision Instrument Design, Inc., a developer and manufacturer of devices to 
determine the transport of drug substances through biological tissues and 
cell culture monolayers since December 1987. From 1985 to 1991 Dr. Grass 
worked at Syntex Research, Inc. at the Institute of Pharmaceutical Sciences 
and was responsible for the development of early stage (pre IND, IND and pre 
NDA) compounds for oral delivery. Dr. Grass received his Pharm.D. from the 
University of Nebraska Medical Center College of Pharmacy and his Ph.D. in 
Pharmacy from the University of Wisconsin, Madison. He is the 1981 
co-recipient of the Ebert Prize, which he received for his work in the ocular 
delivery of drugs.
  
  MICHAEL J. GREEN, PH.D., age 56, has served as Vice President, Chemistry since
February 1996. He is responsible for all Company activities in combinatorial and
medicinal chemistry programs. Before joining the Company, Dr. Green held
positions with Schering-Plough Research Institute, culminating with his position
as a director of chemistry (first in the anti-allergy and anti-inflammatory, and
then in the cardiovascular and central nervous system therapy areas). During his
24 years at Schering-Plough, Dr. 

                                       23

<PAGE>

Green discovered the topical anti-inflammatory corticosteroid, alclometasone 
dipropionate (Legerderm-Registered Trademark- and Aclovate-Registered 
Trademark-) and was part of the team that discovered the non-sedating 
antihistamine, loratadine (Claritin-Registered Trademark-), and also led the 
discovery efforts of several compounds that were tested clinically in asthma 
and psoriasis. Dr. Green received his Ph.D. in Organic Chemistry from the 
University of Sheffield, United Kingdom.
  
  LAWRENCE D. MUSCHEK, PH.D., age 55, has served as President, Research and 
Development of the Company and as a Director of the Company since October 
1997. Prior to joining the Company, Dr. Muschek worked for Solvay 
Pharmaceuticals as Senior Vice President,  Research and Development worldwide 
from  April 1994 to September 1997 and Senior Vice President, Research & 
Development, United States from March 1990 to April 1994.  Dr. Muschek 
received a B.S. in Chemistry from the Philadelphia College of Pharmacy and 
Science and a Ph.D. in Biochemistry from Michigan State University.
   
  JOHN E. WEHRLI, J.D., M.B.A., age 35, has served as Senior Director Legal 
Affairs and Corporate Secretary since February 1999. Prior to joining the 
Company, Mr. Wehrli was employed by the law firm of Cooley Godward LLP, from 
May 1996 to January 1999, where he focused on litigation, intellectual property
and general business matters pertaining to biotechnology companies.  Mr. 
Wehrli is a co-founder, and from October 1996 to November 1998, served as its 
Vice President, Business Development & Intellectual Property. Previously, he 
served as Vice President and Chief Financial Officer for Precision Instrument 
Design, Inc. from November 1989 to October 1996 and as Patent & Licensing 
Associate for the Lawrence Berkeley National Laboratory from May 1995 to May 
1996. From 1985 to 1994, Mr. Wehrli served in a number of research positions 
in chemistry and management positions in scientific computing at Syntex 
Research, Inc. Mr. Wehrli received his J.D. from the University of 
California, Hastings College of the Law and his M.B.A. in Management of 
Technology from the Haas School at the University of California, Berkeley.
  
  GERARD A. WILLS, CPA, age 41, joined the Company in January 1999 as the 
Company's Vice President, Finance and Chief Financial Officer.  Prior to 
joining the Company, Mr. Wills was employed by Molecular Biosystems, Inc. 
where he served as Vice President, Finance and Chief Financial Officer from 
August 1994 to December 1998 and as its Controller from February 1993 to 
August 1994.  From 1990 to February 1993, Mr. Wills served as the Corporate 
Manager of Finance for Maxwell Laboratories, Inc. and from 1986 through 1990, 
Mr. Wills was employed by Intermark, Inc. where he last served as the 
Corporate Controller.  Mr. Wills received a Bachelor of Business 
Administration from the University of Notre Dame.
  
  (c) Compliance with Section 16(a) of the Exchange Act.  The information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" appearing
in the Proxy Statement to be filed on or about April 16, 1999 is incorporated
herein by reference. 

ITEM 11. EXECUTIVE COMPENSATION

  The information under the headings "Election of Directors - Compensation of
Directors," "Executive Compensation" and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation - Compensation Committee
Interlocks and Insider Participation" appearing in the Proxy Statement to be
filed on or about April 16, 1999 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" appearing in the Proxy Statement to be file on or about
April 16, 1999 is incorporated herein by reference. 


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the headings "Election of Directors," "Executive
Compensation" and "Certain Transactions" appearing in the Proxy Statement to be
filed on or about April 16, 1999 is incorporated herein by reference.

                                       24

<PAGE>

                                      PART IV

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

(A) DOCUMENTS FILED AS PART OF THIS REPORT:

     (1)  Financial Statements

     The financial statements required by this item are submitted in a separate
     section beginning on Page F-1 of this Annual Report on Form 10-K:

<TABLE>

         <S>                                             <C>
         Report of Ernst & Young LLP,
         Independent Auditors.......................     F-2

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

         Consolidated Statements of Operations for
         each of the three years in the period
         ended December 31, 1998....................     F-4

         Consolidated Statements of Stockholders'
         Equity (Deficit) for each of the
         three years in the period ended
         December 31, 1998..........................     F-5

         Consolidated Statements of Cash Flows
         for each of the three years in the
         period ended December 31, 1998.............     F-6

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

</TABLE>

(2)  Financial Statement Schedules

     Financial statement schedules have been omitted since they are either not
     required or not applicable, or the information is otherwise included.

(3)  Each management contract or compensatory plan or arrangement required
     to be filed as an exhibit to this Form 10-K has been identified with
     an asterisk ("*") in the table of exhibits set forth below at item 14(c).

(B) REPORTS ON FORM 8-K

  During the fourth quarter of 1998, the Company filed a report on Form 8-K 
announcing the acquisition of NaviCyte, Inc. (See "Item 1--Recent 
Developments--NaviCyte" above.) 

(C) EXHIBITS

     The exhibits listed below are required by Item 601 of Regulation S-K.


<TABLE>
<CAPTION>

            EXHIBIT
            NUMBER   DESCRIPTION OF DOCUMENT
            -------  ------------------------
            <S>      <C>
             2.1+(1) Stock Purchase Agreement dated as of February 28, 1997 among the
                     Registrant, Multiple Peptide Systems, Inc., RAH Acquisition Corp.
                     and Richard A. Houghten, Ph.D.

              2.2(8) Agreement and Plan of Reorganization dated as of 
                     November 12, 1998 by and among the Registrant, NaviCyte, 
                     TPNC Acquisition Corporation, George M. Grass, Ph.D. and 
                     Patrick J. Sinko, Ph.D.

              2.3(9) Purchase and Sale of Assets Agreement dated March 12, 
                     1999 among the Registrant, ChromaXome Corp. and TerraGen
                     Discovery Inc.

              3.3(2) Restated Certificate of Incorporation of the Registrant.

              3.4(3) Certificate of Ownership and Merger (amending Section 1 of the 
                     Restated Certificate of Incorporation)

              3.5(4) Amended and Restated Bylaws of the Registrant.

              4.1    Reference is made to Exhibits 3.3, 3.4 and 3.5.

             10.1(2) Form of Indemnification Agreement entered into between the
                     Registrant and its directors and officers.

            *10.2(2) Amended and Restated 1992 Stock Plan of the Registrant (the "1992
                     Plan").
</TABLE>

                                       25

<PAGE>

<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER   DESCRIPTION OF DOCUMENT
            -------  ------------------------
           <S>       <C>
            *10.3(2) Forms of agreements under the 1992 Plan.

            *10.4(2) 1995 Stock Plan of the Registrant (the "1995 Plan").

            *10.5(2) Forms of agreements under the 1995 Plan.

            *10.6(5) 1996 Incentive Stock Plan of the Registrant, as amended.

            *10.7(10)1996 Employee Stock Purchase Plan, as amended.

             10.8(2) Form of Agreement Regarding Confidentiality and Non-Competition.

            *10.9(2) The 401(k) Plan of the Registrant, as amended.

           *10.11(2) Executive Employment Agreement between Robert S. Whitehead and the
                     Registrant dated August 16, 1993.

           *10.12(2) Promissory Note in the initial principal amount of $100,000 dated
                     March 11, 1994 made by Robert S. Whitehead in favor of the
                     Registrant.

            10.13(11)NaviCyte, Inc. 1997 Stock Plan (the "NaviCyte Plan").

            10.14(11)Form of Registrant's Stock Option Agreement relating to 
                     options originally granted under the NaviCyte Plan 
                     (Incentive Stock Options).

            10.15(11)Form of Registrants' Stock Option Agreement relating to 
                     options originally granted under the NaviCyte Plan 
                     (Nonstatutory Stock Options).

            10.28(2) Master Equipment Lease Agreement No. 8020 between Dominion
                     Ventures, Inc. and the Registrant dated October 7, 1992, with
                     amendments.

           10.29+(2) April 11, 1985 License Agreement between The Scripps Clinic and
                     Research Foundation and Richard Houghten (re: "Means for
                     Sequential Solid Phase Organic Syntheses and Methods Using the
                     Same; Patent Disclosure #85-35)-- the "Tea Bag" License Agreement,
                     including assignments to the Registrant.

           10.33+(2) January 1, 1994 License and Option to License Agreement between
                     Chiron Corporation, Chiron Mimotopes Pty Ltd. and the Registrant.

           10.34+(2) January 1, 1994 Sub-License Agreement between Chiron Corporation
                     and the Registrant

           10.35+(2) Letter of Understanding Concerning Licensing Agreements from the
                     Registrant to Chiron Corporation and Chiron Mimotopes U.S. dated
                     December 15, 1994.

           10.36+(2) March 31, 1995 Heads of Agreement Contract between Chiron
                     Corporation, the Registrant, Multiple Peptide Systems, Chiron
                     Mimotopes U.S. and Chiron Mimotopes Peptide Systems L.L.C.

           10.46+(2) Research and Development Agreement dated February 7, 1996 between
                     Dura Pharmaceuticals, Inc. and the Registrant.

             10.47++ Officers & Associates Bonus Plan (1997 - June 1998)

           10.48+(6) Restated and Third Amended Research and Option Agreement entered into 
                     as of April 15, 1997 between Torrey Pines Institute for Molecular Studies
                     and the Company

           10.49+(6) Research and Development Agreement dated as of June 18, 1997 between 
                     Ono Pharmaceutical Co., Ltd. and the Company.

           10.50 (7) Lease between the Company and Aid Associations for Lutherans, dated
                     September 24, 1997, for premises at 9880 Campus Point Drive.

           10.51 (7) Equipment Financing Line between the Company and Lease Management
                     Services, Inc. dated September 19, 1997.

          *10.52 (7) Note for $100,000 from Robert S. Whitehead dated June 12, 1997.
</TABLE>

                                       26

<PAGE>

<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER   DESCRIPTION OF DOCUMENT
            -------  ------------------------
            <S>      <C>
              *10.53 Executive Employment Agreement between Lawrence D. Muschek and the 
                     Registrant dated October 6, 1997.

               10.54 Reference is made to Exhibits 2.1 and 2.2.

               10.55 Master Loan and Security Agreement between the Company 
                     and Transamerica Business Credit Corporation dated 
                     December 23, 1998.

           10.56+(12)Stock Purchase Agreement made as of May 26, 1998 between 
                     Novartis Pharma AG and the Registrant.

           10.57+(12)Research, Development and License Agreement dated as of 
                     May 26, 1998 between Novartis Pharma AG and the 
                     Registrant (as amended).

           10.58+(13)Library Supply and Sublicense Agreement dated as of 
                     September 30, 1998 between Biogen, Inc. and the 
                     Registrant.

             *10.59  Employment letter dated June 30, 1998 between the 
                     Registrant and Stephen F. Flaim, Ph.D.

             *10.60  Employment letter dated November 6, 1998 between the 
                     Registrant and Michael G. Grey.

             *10.61  Secured Promissory Note dated January 8, 1999 in the 
                     amount of $150,000 from Michael G. Grey.

             *10.62  Secured Promissory Note dated January 11, 1999 in the 
                     amount of $120,000 from John E. Wehrli.

             *10.63  Employment letter dated January 11, 1999 between the 
                     Registrant and John E. Wehrli.

             *10.64  Employment letter dated December 16, 1998 between the 
                     Registrant and Gerard A. Wills.

             *10.65  Employment letter dated January 15, 1996 between the 
                     Registrant and Michael J. Green, Ph.D.

             21.1(4) Subsidiaries of the Registrant.

                23.1 Consent of Ernst & Young LLP, Independent Auditors.

                24.1 Power of Attorney (included in Signature section of this Report).

                27.1 Financial Data Schedule.

</TABLE>

---------
(1)  Incorporated by reference from the Registrant's Current Report on Form 8-K
     dated February 28, 1997 (Exhibit 1).

(2)  Incorporated by reference from the Registrant's Registration Statement 
     on Form S-1 (File No. 333-1376) which was declared effective on March 29,
     1996 (to the Exhibits of the same numbers in such Registration Statement).

(3)  Incorporated by reference from the Registrant's Current Report on 
     Form 8-K dated May 1, 1997 (Exhibit 1).

(4)  Incorporated by reference from the Registrant's Annual Report on Form 
     10-K for the year ended December 31, 1997 (Exhibit 3.4).

(5)  Incorporated by reference from Appendix A of the Registrant's Proxy 
     Statement for the 1998 Annual Meeting of Stockholders.

(6)  Incorporated by reference from the Registrant's Quarterly Report on 
     Form 10-Q for the Quarter Ended June 30, 1997.

(7)  Incorporated by reference from the Registrant's Quarterly Report on 
     Form 10-Q for the Quarter Ended September 30, 1997.

(8)  Incorporated by reference from the Registrant's Current Report on 
     Form 8-K dated November 23, 1998 (Exhibit 2.1).

(9)  Incorporated by reference from the Registrant's Current Report on 
     Form 8-K dated March 16, 1999 (Exhibit 2.1).

(10) Incorporated by reference from Appendix B of the Registrant's Proxy 
     Statement for the 1998 Annual Meeting of Stockholders.

(11) Incorporated by reference from the Registrant's Registration Statement on 
     Form S-8 filed on November 24, 1998 with respect to the NaviCyte Plan 
     (Exhibits 99.1, 99.2 and 99.3).

(12) Incorporated by reference from the Registrant's Quarterly Report on 
     Form 10-Q for the Quarter Ended June 30, 1998 (Exhibits 10.1 and 10.2)

(13) Incorporated by reference from the Registrant's Quarterly Report on 
     Form 10-Q for the Quarter Ended September 30, 1998 (Exhibit 10.1).

+    The Registrant has been granted confidential treatment of certain portions
     of these agreements or arrangements.

(D)      FINANCIAL STATEMENT SCHEDULES.

         Not applicable.

                                       27

<PAGE>

                                     SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                TREGA BIOSCIENCES, INC.

Date:    March 30, 1999        /s/ Michael G. Grey
                                -------------------------
                                Michael G. Grey
                                President and Chief Executive Officer 
                                (Principal Executive Officer)

                                 /s/ Gerard A. Wills
                                -------------------------
                                Gerard A. Wills
                                Vice President, Finance and Chief Financial 
                                Officer (Principal Financial and Accounting 
                                Officer)

                                 POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Grey and Gerard A. Wills, and each one
of them, his true and lawful attorney-in-fact, each with full power of
substitution, in any and all capacities to sign any amendments to this Annual
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 said attorneys-in-fact or their
substitutes may do or cause to be done by virtue hereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

                    NAME                            TITLE                     DATE
           -----------------------  -----------------------------------     -------
          <S>                        <C>                                    <C>
          /s/ Robert S. Whitehead    Chairman of the Board of Directors     March 28, 1999
          -----------------------
          Robert S. Whitehead

          /s/ James C. Blair         Director                               March 30, 1999
          -----------------------
          James C. Blair

          /s/ Michael G. Grey        Director, President and Chief          March 30, 1999
          -----------------------    Executive Officer
          Michael G. Grey

          /s/ Harry D. Lambert       Director                               March 30, 1999
          -----------------------
          Harry D. Lambert

          /s/ Jeremy M. Levin        Director                               March 29, 1999
          -----------------------
          Jeremy M. Levin

          /s/ Lawrence D. Muschek    Director and President,                March 30, 1999
          -----------------------    Research and Development
          Lawrence D. Muschek

          /s/ Harvey S. Sadow        Director                               March 30, 1999
          -----------------------
          Harvey S. Sadow

          /s/ Ronald R. Tuttle       Director                               March 30, 1999
          -----------------------
          Ronald R. Tuttle

          /s/ Anders P. Wiklund      Director                               March 30, 1999
          -----------------------
          Anders P. Wiklund

</TABLE>

                                      28

<PAGE>

                      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                 PAGE
                                                                                 ----
             <S>                                                                 <C>
             TREGA BIOSCIENCES, INC.

             Report of Ernst & Young LLP, Independent Auditors                    F-2

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

             Consolidated Statements of Operations for each of the three years in
               the period ended December 31, 1998                                 F-4

             Consolidated Statements of Stockholders' Equity (Deficit) for each
               of the three years in the period ended December 31, 1998           F-5

             Consolidated Statements of Cash Flows for each of the three years
               in the period ended December 31, 1998                              F-6

             Notes to Consolidated Financial Statements                           F-7


</TABLE>



                                       F-1

<PAGE>


                 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders 
Trega Biosciences, Inc.

We have audited the accompanying consolidated balance sheets of Trega
Biosciences, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998.  These financial statements
are the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Trega Biosciences,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

                                     /s/ ERNST & YOUNG LLP

San Diego, California 
February 19, 1999


                                       F-2

<PAGE>

                              Trega Biosciences, Inc. 
                            Consolidated Balance Sheets
                         (in thousands, except share data)

<TABLE>
<CAPTION>

                                                                           DECEMBER 31,
                                                                        1998          1997
                                                                     --------      --------
 <S>                                                                <C>            <C>
 ASSETS                                                                           
 Current assets:                                                                  
    Cash and cash equivalents                                        $  9,755      $  5,457
    Short-term investments                                              6,507        13,970
    Accounts receivable and other current assets                          778           676
                                                                     --------      --------
 Total current assets                                                  17,040        20,103

 Property and equipment, at cost:                                                 
    Machinery and equipment                                             5,868         4,531
    Leasehold improvements                                                859           422
    Furniture and fixtures                                                412           241
                                                                     --------      --------
                                                                        7,139         5,194
    Less accumulated depreciation and amortization                     (3,016)       (2,453)
                                                                     --------      --------
                                                                        4,123         2,741
 Other assets                                                           8,372         2,275
                                                                     --------      --------
                                                                     $ 29,535      $ 25,119
                                                                     --------      --------
                                                                     --------      --------
 LIABILITIES AND STOCKHOLDERS' EQUITY                                             
 Current liabilities:                                                             
    Accounts payable                                                 $  1,539      $    211
    Accrued compensation and other accrued liabilities                  2,399         1,976
    Current portion of debt obligations                                 1,251         2,123
    Deferred revenue                                                    3,794         3,002
                                                                     --------      --------
 Total current liabilities                                              8,983         7,312
 Long-term debt obligations, net of current portion                     2,689         1,589
 Deferred rent                                                            223           -
 Commitments and contingencies                                                    

 Stockholders' equity:                                                            
    Common stock, $.001 par value:                                                
      Authorized shares - 40,000,000 at December 31, 1998 and 1997                    
      Issued and outstanding shares - 17,481,097 and 13,863,562                   
       at December 31, 1998 and 1997, respectively                         18            14
    Additional paid-in capital                                         86,645        73,087
    Common stock issuable                                                  16            16
    Deferred compensation                                                (609)       (1,270)
    Accumulated deficit                                               (68,430)      (55,629)
                                                                     --------      --------
 Total stockholders' equity                                            17,640        16,218
                                                                     --------      --------
                                                                     $ 29,535      $ 25,119
                                                                     --------      --------
                                                                     --------      --------
</TABLE>

                     See accompanying notes.

                                       F-3

<PAGE>

                              Trega Biosciences, Inc.
                       Consolidated Statements of Operations
                     (in thousands, except net loss per share)


<TABLE>
<CAPTION>

                                                            YEARS ENDED DECEMBER 31,
                                                    1998            1997               1996
                                                ------------    ------------         ----------
<S>                                             <C>             <C>               <C>
  Revenues:                                                                       
     Contract research and license fees         $      6,799    $      7,334         $    5,750
     Related party contract research                   3,970           -                -
     Net sales                                            21             430              2,507
                                                ------------    ------------         ----------
                                                      10,790           7,764              8,257

  Costs and expenses:                                                             
     Cost of sales                                         7             341              2,025
     Research and development                         17,934          14,819             11,781
     Acquired in-process research and                  
       development                                     1,000               -              2,585
     Selling, general and administrative               5,181           4,346              4,191
                                                ------------    ------------         ----------
                                                      24,122          19,506             20,582
                                                ------------    ------------         ----------
  Loss from operations                               (13,332)        (11,742)           (12,325)

  Other income:                                                                   
     Net interest income and other                       531           1,115               637
     Gain on sale of MPS                                   -           1,255                 -
                                                ------------    ------------         ----------
  Net loss                                      $    (12,801)   $     (9,372)        $  (11,688)
                                                ------------    ------------         ----------
                                                ------------    ------------         ----------

  Basic and diluted net loss per share          $       (.89)   $       (.69)        $    (1.17)
                                                ------------    ------------         ----------
                                                ------------    ------------         ----------

  Shares used in computing basic and diluted                                      
    net loss per share                                14,380          13,603              9,956
                                                ------------    ------------         ----------
                                                ------------    ------------         ----------


</TABLE>

                 See accompanying notes.                  

                                       F-4

<PAGE>

                             TREGA BIOSCIENCES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   (in thousands, except net loss per share)

<TABLE>
<CAPTION>

                                                                                                       
                                      PREFERRED STOCK      COMMON STOCK    ADDITIONAL COMMON        
                                    ------------------  -----------------  PAID-IN    STOCK     DEFERRED    ACCUMULATED
                                      SHARES    AMOUNT    SHARES   AMOUNT  CAPITAL   ISSUABLE COMPENSATION    DEFICIT       TOTAL
                                    ------------------  -------------------------------------------------------------------------
<S>                                <C>          <C>    <C>         <C>    <C>        <C>       <C>          <C>          <C>   
Balance at December 31, 1995        15,931,493   $16      310,374  $  -   $ 30,367   $    -    $   (236)    $  (34,522)  $ (4,375)
  Issuance of preferred stock        3,366,670     3            -     -     10,054        -           -              -     10,057
  Exercise of stock options                  -     -       94,383     -        100        -           -              -       100
  Deferred compensation for             
    issuance of stock options                -     -            -     -      2,218        -      (2,218)             -         -
  Amortization of deferred
    compensation                                                -     -          -        -         523              -        523
  Dividends on Series One
    preferred stock at $.08 per
    share                                                       -     -          -        -           -            (47)       (47)
  Initial public offering of
    common stock                             -     -    3,795,000     4     27,339        -           -              -     27,343
  Conversion of preferred stock to
    common stock                   (19,298,163)  (19)   8,975,845     9         10        -           -              -          -
  Issuance of common stock for
    business acquisition of
    ChromaXome Corp.                         -     -      193,170     -      1,093        -           -              -       1,093
  Recognition of ChromaXome Corp.
    milestones                               -     -            -     -          -    1,281           -              -       1,281
  Unrealized loss on short-term  
    investments                              -     -            -     -       (131)       -           -              -       (131)
  Net loss                                   -     -            -     -          -        -           -        (11,688)   (11,688)
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   -------- 
Balance at December 31, 1996                 -     -    13,368,772    13     71,050    1,281      (1,931)      (46,257)    24,156 
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   -------- 

  Exercise of stock options and 
    other                                    -     -       211,284    -        473        -           -              -        473
  Issuance of common stock under
    employee stock purchase plan             -     -        30,581    -        119        -           -              -        119
  Amortization of deferred
    compensation                             -     -             -    -          -        -         661              -        661
  Reverse unrealized loss on
    short-term investments                   -     -             -    -        131        -           -              -        131
  Issuance of common stock
    related to previous 
    recognition of ChromaXome 
    Corp milestones                                       240,804     1      1,264   (1,265)                                    -
  Issuance of common stock for 
    services                                       -       12,121     -         50        -           -              -         50
  Net loss                                   -     -            -     -          -        -           -         (9,372)    (9,372)
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   --------
    Balance at December 31, 1997             -     -   13,863,562    14     73,087       16      (1,270)       (55,629)    16,218
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   --------
  Exercise of stock options                  -     -      282,055     -        140        -           -              -        140
  Issuance of common stock under
    employee stock purchase plan             -     -       40,582     -        122        -           -              -        122
  Amortization of deferred
    compensation                             -    -             -     -          -        -         661              -        661
  Issuance of common stock to 
    Novartis Pharma                          -    -     1,866,667     2      6,998        -           -              -      7,000
    NaviCyte acquisition                     -    -     1,428,231     2      6,187        -           -              -      6,189
    Extension of officer options             -    -             -     -        111        -           -              -        111
  Net loss                                   -    -             -     -          -        -           -        (12,801)   (12,801)
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   --------
    Balance at December 31, 1998            -     -    17,481,097   $18   $ 86,645   $   16     $  (609)    $  (68,430)  $ 17,640
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   --------
                                  ------------   ---   -----------   ---   --------   -----     --------      --------   --------

</TABLE>

                                       F-5

<PAGE>


                              Trega Biosciences, Inc.
                       Consolidated Statements of Cash Flows
                                   (in thousands)

<TABLE>
<CAPTION>

                                                                            YEARS ENDED DECEMBER 31,
                                                                        1998          1997         1996
                                                                    ---------     ---------     --------
<S>                                                                 <C>           <C>           <C>
OPERATING ACTIVITIES                                                                           
Net loss                                                            $ (12,801)    $  (9,372)    $(11,688)
Adjustments to reconcile net loss to net cash flows                                            
   used in operating activities:                                                               
     Depreciation and amortization                                      1,604         1,033          790
     Amortization of note receivable discount                             (50)          (37)           -
     Amortization of deferred compensation                                661           661          523
     Accrued interest on TPIMS notes payable                              (81)            -            -
     Gain on sale of asset                                                (68)            -            -
     Realized loss on sale of investment                                    -            88          534
     License fee income                                                     -             -       (3,369)
     Common stock and options  issued for services                        111            50            -
     Gain on sale of MPS                                                   -         (1,255)           -
     Acquired in-process research and development                       1,000             -        2,374
     Changes in operating assets and liabilities, net of                                       
       effects from the transfer of assets from                                                
       sale of MPS in 1997:                                                                    
         Accounts receivable                                             (134)          (61)        (220)
         Other current assets                                             148          (422)        (150)
         Accounts payable                                                 962          (479)         481
         Other accrued liabilities                                        423          (522)       1,361
         Deferred rent                                                    223             -            -
         Deferred revenue                                                 660         1,244         (243)
                                                                    ---------     ---------     --------
Net cash used in operating activities                                  (7,342)       (9,072)      (9,607)

INVESTING ACTIVITIES                                                                           
Purchase of short-term investments                                     (7,064)       (21,540)    (26,574)
Maturities of short-term investments                                    14,527        21,441      15,450
Additions to property and equipment, net                               (2,788)        (2,045)       (798)
Proceeds from disposition of equipment                                    198              -           -
Proceeds from sale of MPS, net                                              -          1,149           -
Purchase of NaviCyte, net of cash acquired                               (557)            -            -
Other assets                                                             (226)          (39)        (282)
                                                                    ---------     ---------     --------
Net cash provided by (used in) investing activities                     4,090        (1,034)     (12,204)

FINANCING ACTIVITIES                                                                           
Principal payments under debt obligations                              (2,177)         (569)        (416)
Proceeds from equipment notes and notes payable                         2,465         1,925            -
Redemption of preferred stock                                               -             -       (2,819)
Issuance of common and preferred stock                                  7,262           592       37,500
                                                                    ---------     ---------     --------
Net cash provided by financing activities                               7,550         1,948       34,265
                                                                    ---------     ---------     --------
Net increase (decrease)  in cash and cash equivalents                   4,298        (8,158)      12,454
Cash and cash equivalents at beginning of year                          5,457        13,615        1,161
                                                                    ---------     ---------     --------
Cash and cash equivalents at end of year                            $   9,755     $   5,457      $13,615
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                             
Cash paid during the year for interest                              $     232     $     117      $    87
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND                                              
   FINANCING ACTIVITIES:                                                                       
Property and equipment acquired under capital lease                                            
   obligations                                                      $       -     $       -      $   450
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
Receipt of Magainin common stock in exchange for                                               
   license agreement                                                $       -     $       -      $ 3,369
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
Common stock issued and common stock issuable in                                               
   connection with the purchase of ChromaXome Corp.                 $       -     $       -      $ 2,374
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
Dividends on Series One preferred stock at $.08 per                                            
   share                                                            $       -     $       -      $    47
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
Notes received in connection with the sale                                       
   of MPS, net of discount of $213,000                                $     -       $   537        $   -
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
Note payable issued in exchange for TPIMS patent and purchased      
   technology                                                       $       -     $   1,300      $     -
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
Issuance of common stock and options to acquire NaviCyte            $   6,189     $       -      $     -
                                                                    ---------     ---------     --------
                                                                    ---------     ---------     --------
</TABLE>

            See accompanying notes.

                                       F-6

<PAGE>



                              Trega Biosciences, Inc. 
                     Notes to Consolidated Financial Statements
                                          
                                 December 31, 1998

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

  Trega Biosciences, Inc. (the "Company" or "Trega") is a drug discovery 
company focused on accelerating the process of drug discovery by using small 
molecule combinatorial chemistry and other drug discovery technologies to 
create novel drugs having greater chances of clinical success. In combination 
with its wholly owned subsidiary, NaviCyte, Inc. ("NaviCyte"), Trega offers 
products and services to the pharmaceutical and biopharmaceutical industries. 
Trega also uses its drug discovery technologies in its internal development 
programs, which are focused on discovering small molecules acting on 
melanocortin receptors, which may be important in the treatment of 
inflammatory and metabolic diseases. All intercompany accounts and 
transactions have been eliminated in consolidation.

  The Company's success is largely dependent on its ability to enter into 
collaborations for drug discovery which utilize the Company's combinatorial 
chemistry, melanocortin biology and other drug discovery technologies, and 
for drug development based on drug candidates discovered in internal research 
programs or through alliances with biotechnology or pharmaceutical companies.

  The Company faces risks associated with companies whose products are in
development.  These risks include, among others, the Company's need for
additional financing to maintain the competitiveness of its combinatorial
chemistry and other drug discovery technologies and to conduct research and
development and clinical testing.  There is no assurance such financing will be
available to the Company when required or that such financing will be available
under favorable terms.

  The Company believes that patents and other proprietary rights are important
to its business.  The Company's policy is to file patent applications to protect
technology, inventions and improvements that are considered important to the
development of its business.  The patent positions of pharmaceutical and
biotechnology firms, including the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved.

USE OF ESTIMATES

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements.  Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

  The Company considers all highly liquid investments with maturities, when
purchased, of three months or less to be cash equivalents. The Company invests
in short-term debt securities with original maturities in excess of 90 days,
which are presented as short-term investments in the accompanying consolidated
balance sheets.  At December 31, 1998 and 1997, the cost of cash equivalents and
short-term investments was the same as the market value.  Accordingly, there
were no unrealized gains or losses.  The Company evaluates the financial
strength of institutions at which significant investments are made and believes
the related credit risk is limited to an acceptable level.

The following is a summary of available-for-sale securities (in thousands):

<TABLE>
<CAPTION>

                                         DECEMBER 31,
                                       1998        1997
                                     -------     -------
<S>                                  <C>         <C>
U.S. corporate debt securities..     $ 6,354     $15,571
Other ..........................         153         412
                                     -------     -------
                                     $ 6,507     $15,983
                                     -------     -------
                                     -------     -------

</TABLE>


  All available-for-sale securities by contractual maturities are due in one 
year or less.  There were no cash and cash equivalents classified as 
available-for-sale at December 31, 1998.  Included in cash and cash 
equivalents at December 31, 1997 was $2,013,000 of securities classified as 
available-for-sale.

                                       F-7

<PAGE>

REVENUE RECOGNITION

  Contract research is recorded as earned, generally ratably, as research and 
development activities are performed under the terms of the contract.  
Payments received in excess of amounts earned are deferred.  Revenue from 
product sales and library access fees are recognized upon shipment.  
Non-refundable license fees and milestone payments are recognized when 
received as the Company has no other performance obligations. 
  
  Novartis Pharma AG ("Novartis") is a related party based on its ownership 
interest in the Company, and revenues received from Novartis therefore are 
classified as related party revenue.

DEPRECIATION AND AMORTIZATION

  Depreciation of property and equipment is provided using the straight-line 
method over the estimated useful lives of three to five years or the lease 
term. Amortization of leasehold improvements is provided using the 
straight-line method over the lesser of the remaining lease term or the life 
of the asset. Amortization of property held under capital leases is included 
in depreciation expense.

PATENTS AND PURCHASED TECHNOLOGY

  Patents and purchased technology are stated at cost and are included in 
other assets in the accompanying consolidated balance sheets.  The patents 
and purchased technology are being amortized using the straight-line method 
over a useful life of ten years.  Statement of Financial Accounting Standards 
No. 121 ("SFAS 121"), "Accounting for Impairment of Long-Lived Assets and for 
Long-Lived Assets to be Disposed of" requires impairment losses to be 
recorded on long-lived assets used in operations when indicators of 
impairment are present and the undiscounted cash flows estimated to be 
generated by those assets are less than the assets' carrying amount.  The 
Company periodically monitors the patents and purchased technology for 
indications of impairment of value.  At December 31, 1998, management 
believes that no impairment has occurred. 
  
RESEARCH AND DEVELOPMENT EXPENSES

  Research and development costs are expensed as incurred.

RECLASSIFICATIONS

     Certain prior period amounts have been reclassified to conform with the
     current years' presentation.
     
STOCK-BASED COMPENSATION

  In October 1995, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standard No. 123 ("SFAS No. 123"), "Accounting for 
Stock-Based Compensation," which is effective for the year ending December 
31, 1996. SFAS No. 123 allows companies to either account for stock-based 
compensation under the new provisions of SFAS No. 123 or under the provisions 
of Accounting Principles Opinion No. 25 ("APB No. 25"), "Accounting for Stock 
Issued to Employees," but requires pro forma disclosure in the footnotes to 
the financial statements as if the measurement provisions of SFAS No. 123 had 
been adopted. The Company has continued accounting for its stock-based 
compensation in accordance with the provisions of APB No. 25.

                                       F-8

<PAGE>

NET LOSS PER SHARE
  
  In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per 
Share." SFAS No. 128 requires the presentation of basic and diluted earnings 
per share amounts.  Basic earnings per share is calculated based upon the 
weighted average number of common shares outstanding during the period while 
diluted earnings per share also gives effect to all potential diluted common 
shares outstanding during the period such as options, warrants, convertible 
securities and contingently issuable shares.  SFAS No. 128 is effective for 
periods ending after December 15, 1997.  All potential dilutive common shares 
have been excluded from the calculation of diluted earnings per share, as 
their inclusion would be anti-dilutive.
  
  Recent interpretations by the Securities and Exchange Commission have 
altered the treatment of preferred stock previously included in computing 
certain earnings-per-share data.  The Company previously considered 
convertible preferred stock as outstanding in pre-IPO periods from the date 
of the original issuance in computing earnings per share.  To conform with 
the recent interpretations, the Company has revised its calculation of 
earnings per share for all pre-IPO periods to exclude the impact of the 
convertible preferred shares.
  
NEW ACCOUNTING STANDARDS

  During 1998, the Company adopted Statement of Financial Accounting Standard 
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" and Statement of 
Financial Accounting Standard No. 131 ("SFAS No. 131"), "Segment 
Information." SFAS No. 130 requires that all components of comprehensive 
income, including net income, be reported in the financial statements in the 
period in which they are recognized.  Comprehensive income is defined as the 
change in equity during a period from transactions and other events and 
circumstances from non-owner sources.  Net income and other comprehensive 
income, including foreign currency translation adjustments and unrealized 
gains and losses on investments, are required to be reported, net of their 
related tax effect, to arrive at comprehensive income.  For the year ended 
December 31, 1998 comprehensive loss is the same as net loss.  SFAS No. 131 
amends the requirements for public enterprises to report financial and 
descriptive information about its reportable operating segments.  Operating 
segments, as defined in SFAS No. 131, are components of an enterprise for 
which separate financial information is available and is evaluated regularly 
by the Company in deciding how to allocate resources and in assessing 
performance.  The financial information is required to be reported on the 
basis that is used internally for evaluating the segment performance.  The 
Company operates in one business and operating segment only, and therefore 
the adoption of this standard did not have a material impact on the Company's 
financial statements.
  
FINANCIAL STATEMENT DETAILS

OTHER ASSETS

  Other assets consist of the following major classes (in thousands):

<TABLE>
<CAPTION>

                                        1998         1997
                                     -------      -------
<S>                                  <C>          <C>
Patents and purchased technology     $ 1,274      $ 1,300
Developed technology                   6,356           --
                                     -------      -------
                                       7,630        1,300
Less: Accumulated amortization          (274)         (94)
                                     -------      -------
                                       7,356        1,206
Other assets                           1,016        1,069
                                     -------      -------
                                     $ 8,372      $ 2,275
                                     -------      -------
                                     -------      -------
</TABLE>

ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

     Accounts payable and other accrued liabilities consist of the following
major classes (in thousands):

<TABLE>
<CAPTION>

                                1998       1997
                              ------     ------
<S>                           <C>        <C>
Accrued compensation          $  662     $  497
Other accrued liabilities      1,737      1,479
                              ------     ------
                              $2,399     $1,976
                              ------     ------
                              ------     ------

</TABLE>

                                       F-9

<PAGE>

NET INTEREST INCOME AND OTHER

  Net interest income and other consist of the following major classes (in
thousands):

<TABLE>
<CAPTION>

                          1998         1997         1996
                       -------      -------      -------
<S>                    <C>          <C>          <C>
Interest income        $   769      $ 1,405      $ 1,274
Interest expense          (238)        (202)        (103)
Loss on investment          --          (88)        (534)
                       -------      -------      -------
                       $   531      $ 1,115      $   637
                       -------      -------      -------
                       -------      -------      -------
</TABLE>

3.  ACQUISITION OF NAVICYTE, INC.

  In November 1998, the Company acquired all of the outstanding common stock of
NaviCyte, Inc. in a transaction accounted for as a purchase.  Total
consideration included 1,428,000 shares of the Company's common stock, the
assumption of options to acquire 1,071,000 shares of the Company's common stock
and $560,000 of cash.  A summary of the acquisition costs and allocation to the
assets acquired and liabilities assumed is as follows:


<TABLE>

         <S>                                                          <C>
         Total acquisition costs:
                  Cash paid at acquisition date                       $      560,000
                  Issuance of common stock and options                     6,189,000
                  Acquisition of related expenses                            378,000
                  Assumed liabilities                                        520,000
                                                                      ---------------
                                                                      $    7,647,000
                                                                      ---------------
                                                                      ---------------
         Allocation to assets and liabilities as follows:
                  Tangible assets acquired                            $      291,000
                  Acquired in-process technology                           1,000,000
                  Developed technology                                     6,356,000
                                                                      ---------------
                                                                      $    7,647,000
                                                                      ---------------
                                                                      ---------------
</TABLE>

  Assuming that the acquisition of NaviCyte had occurred on the first day of the
Company's fiscal year ended December 31, 1997, pro forma condensed consolidated
results of operations would be as follows (in thousands except per share
amounts):

<TABLE>
<CAPTION>

                                         Years ended December 31,
                                            1998          1997    
                                         --------        -------
<S>                                      <C>             <C>
                                                (unaudited)
Net revenues                             $ 11,947      $  8,551
Net loss                                  (12,720)      (10,343)
Basic and diluted net loss per share     $   (.80)     $   (.69)


</TABLE>

4.   SALE OF MULTIPLE PEPTIDE SYSTEMS, INC. 

  In February 1997, the Company sold its wholly-owned subsidiary, Multiple 
Peptide Systems, Inc. ("MPS"), to an entity owned by Richard A. Houghten, 
Ph.D. ("Dr.  Houghten").  Dr. Houghten is a founder of the Company and prior 
to the sale of MPS was the Chief Technical Officer and a Director of the 
Company.  In connection with the sale, Dr. Houghten resigned as an officer of 
the Company. Dr. Houghten did not stand for re-election as a director at the 
Annual Stockholder's Meeting held on June 11, 1997. Dr. Houghten also is the 
founder, an executive officer and a Director of Torrey Pines Institute for 
Molecular Studies ("TPIMS"), a not-for-profit biomedical research institution 
which performed contract research services for the Company.  Prior to the 
Company's sale of MPS, the business of MPS was comprised of manufacturing and 
marketing certain peptides and other compounds to  government entities, 
universities, research institutions and private companies.
  
  In exchange for the sale of MPS, the Company received consideration of $1.5 
million (net $1.25 million cash) and a $750,000 non-interest bearing note 
with payments due on the third, fourth, and fifth anniversaries of the sale.  
The $750,000 was discounted by $213,000 to a present value of $537,000, using 
an imputed rate of interest of 9%.  The Company recorded a gain on the sale 
of MPS of $1.255 million.  In connection with the sale, the Company has 
agreed, for a period of seven years, not to (i) engage in certain activities 
which would be competitive with the business of MPS or (ii) license certain 
technologies (which are presently licensed from the Company to MPS) to 
entities which are engaged primarily in a business similar to the business of 
MPS.

                                       F-10
<PAGE>

5. CHROMAXOME ACQUISITION

  Effective August 1, 1996, the Company acquired all the outstanding shares of
ChromaXome in exchange for (i) 193,170 shares of the Company's common stock and
options to acquire 27,660 shares of the Company's common stock with a total
combined value of approximately $1.1 million and (ii) approximately $228,000 in
transaction costs and cash advances to ChromaXome.  The Company accounted for
the acquisition of ChromaXome using the purchase method of accounting.
Substantially the entire purchase price was allocated to acquired in-process
research and development which resulted in a charge to operations of $1.3
million in 1996. 

  In connection with the acquisition, the Company also issued an additional
240,804 shares of the Company's common stock in August and November 1997 as the
result of certain milestones being achieved in December 1996.  An additional
amount of 659 shares, currently reflected as common stock issuable, may be
issuable at December 31, 1998.  The fair value of these shares resulted in an
additional charge of approximately $1.3 million for acquired in-process research
and development in the statement of operations for the year ended December 31,
1996.

6. COMMITMENTS AND LONG-TERM DEBT

LEASES 

  In September 1997, the Company entered into a 10-year lease for its facility
in San Diego, California.  The Company has occupied such premises since May
1998.  Annual rent is $1.7 million and is subject to annual increases of 3.5%. 
The Company has the option to extend the lease for an additional term of 5 years
subject to terms and conditions specified in the lease.

  The Company moved out of its former facility completely as of June 1998.  Rent
expense for both premises for the years ending December 31, 1998, 1997 and 1996
was approximately $1.8 million, $.8 million and $.8 million, respectively.  The
Company leases certain equipment under a capital lease obligation.  The Company
did not acquire any equipment under capital leases during December 31, 1998 and
1997.

  Annual future minimum payments under capital and operating leases at December
31 are as follows:

<TABLE>
<CAPTION>

                                                       OPERATING        CAPITAL
YEARS ENDED DECEMBER 31                                 LEASES          LEASES
-----------------------                             -------------    ---------
<S>                                                 <C>              <C>
1999                                                  $  1,976,000   $   212,000
2000                                                      2,045,000      107,000
2001                                                      2,117,000        9,000
2002                                                      2,190,000            -
2003                                                      2,267,000            -
                                                      -------------  -----------
                                                       $10,595,000       328,000
                                                      ------------- 
                                                      ------------- 
Less amounts representing interest                                       (30,000)
                                                                     -----------
Present value of remaining minimum payments                              298,000
Less current portion of obligations                                     (186,000)
                                                                     -----------
                            Long-term obligations                    $   112,000
                                                                     -----------
                                                                     -----------

</TABLE>

LONG-TERM DEBT

  In December 1998, the Company obtained an equipment financing line of $2.2
million, of which it drew down approximately $1.1 million by December 31, 1998. 
The loan, which is secured by the equipment, bears interest at 11.3% and is to
be repaid monthly over a four-year term.

  In September 1998, the Company obtained an equipment financing line under an
existing master agreement established in 1997.  This equipment financing line
of $750,000 was completely drawn down in September 1998.  The previous
equipment financing line expired in July 1998 with an outstanding balance of
approximately $2.3 million.  The loans are secured by the equipment.  The terms
of the Company's loan agreement call for amounts drawn down under the loans to
be repaid monthly over a four-year term, including interest payments based on an
interest rate of approximately 8.85%.

                                       F-11

<PAGE>

  Principal payments due on long-term debt at December 31 are as follows:


<TABLE>
<CAPTION>

                                                                     LONG-TERM
YEARS ENDED DECEMBER 31                                                DEBT
-----------------------                                              ---------
<S>                                                                  <C>        
1999                                                                 $1,065,000
2000                                                                  1,021,000
2001                                                                  1,020,000
2002                                                                    536,000
                                                                   ------------
                                                                      3,642,000
Less current portion of obligations                                  (1,065,000)
                                                                   ------------
                            Long-term obligations                   $ 2,577,000
                                                                   ------------
                                                                   ------------
</TABLE>

  The carrying value of the Company's obligations under long-term debt
approximates its fair value and the implicit interest rate approximates the
Company's borrowing rate.

7. TPIMS AGREEMENT

  Since 1992, the Company has been party to a Research and Option Agreement, 
as amended, with Torrey Pines Institute for Molecular Studies ("TPIMS").  A 
primary purpose of the Company's relationship with TPIMS has been to give the 
Company access to support services provided by TPIMS scientific personnel and 
to provide a source of combinatorial libraries and other discoveries.  As of 
April 15, 1997, the Company entered into a Restated and Third Amended 
Research and Option Agreement with TPIMS (the "TPIMS Agreement").  In 
connection with the TPIMS Agreement, the Company acquired certain patents and 
purchased technology, previously invented by TPIMS, in exchange for $1.3 
million (the "Purchase Price") which, together with $115,000 of accrued 
interest, was paid to TPIMS on April 14, 1998.  In addition, the TPIMS 
Agreement eliminated potential related royalties otherwise payable on such 
patents and purchased technology. The TPIMS Agreement also extended, through 
July 14, 1998, the existing funded research relationship between the parties. 
In January 1998, the Company announced that the TPIMS Agreement would not be 
extended.  

8. COLLABORATIVE ARRANGEMENTS

  In December 1998, the Company entered into an agreement with Warner-Lambert,
which supercedes a previous agreement for the purchase of $1.5 million of the
Company's stock.  The new agreement is a Library Supply Agreement in which the
Company shipped $1.5 million worth of combinatorial libraries, as part of its
Chem.Folio-TM- Program, in December 1998.
  
  In November 1998, the Company sold approximately 1.9 million shares of 
common stock to Novartis for $7 million.  The stock was sold pursuant to a 
put option the Company had received in connection with its collaboration with 
Novartis entered into in May 1998.  The agreement called for the companies to 
conduct a joint research program.  Under the terms of the agreement, the 
Company received $2 million, upon execution in May 1998, for past research 
activities. This non-refundable fee was recognized as revenue at that time.  
Additionally, Novartis is obligated to make payments to the Company totaling 
approximately $10 million over three years to support this research.  These 
payments are made semiannually.  Through December 31, 1998, the Company had 
received approximately $3.3 million in guaranteed payments under this 
provision, under which $2 million was recognized as revenue in 1998 and the 
balance was recorded as deferred revenue.  In addition, the Company may earn 
future milestones and royalties under this agreement. 
  
  In September 1998, the Company entered into a Library Supply and Sublicense 
Agreement with Biogen, Inc. ("Biogen") under which the Company will receive a 
minimum of $7.5 million over two years for supplying combinatorial chemistry 
libraries.  In addition, the Company has agreed to provide Biogen with 
non-exclusive worldwide licenses to certain of its chemical-synthesis 
technologies. As of December 31, 1998, the Company has received a license fee 
under the terms of this agreement.  
  
  In July 1998, as the result of achieving a milestone under its agreement 
with Ono Pharmaceuticals Co., Ltd., ("Ono"), the Company received $2 million 
to fund the next phase of the program.  In June 1997, the Company entered 
into its 1997 Research and Development Agreement with Ono, whereby the 
Company received $2 million as a license fee in connection with the screening 
by the Company of certain of its combinatorial libraries against certain 
biological screens.  The Company received $2 million in both July 1997 and 
July 1998 (noted above) for research to be done under this agreement.  These 
payments are treated as deferred revenue and are recognized as revenues as 
related work is performed under the contract during the period July 1997 
through July 1999.  Relating to this contract, through December 31, 1998, $3 
million had been recognized as revenue and $1 million is included in deferred 
revenue.  The non-refundable license fee was recognized as revenue in 1997. 

                                       F-12

<PAGE>

  In May 1998, the Company and Ono reached definitive agreement to expand 
their existing relationship.  Under the new agreement, the Company will 
additionally create custom combinatorial libraries, optimize lead compounds 
discovered by Ono and undertake screening of those compounds in a target of 
interest to Ono.  The Company received research funding of approximately $1.9 
million of which all but $115,000 had been recognized as revenue through 
December 31, 1998. In addition, the Company may earn future milestones and 
royalties under this agreement.
  
  In connection with the Company's research agreement with Dura 
Pharmaceuticals ("Dura"), the Company is committed to fund $6,000,000 over 
four years in a drug discovery and development collaboration using Dura's 
proprietary drug delivery technology and Company compounds (such as HP 228).  
As of December 31, 1998, $4,650,000 had been funded since the inception of 
the 1996 Dura agreement.
  
9. LICENSE FEE

  In September 1996, the Company received, through MPS, 275,000 shares of 
common stock of Magainin Pharmaceuticals Inc. ("Magainin"), with a then 
current market value of $3,369,000, in exchange for a royalty interest in 
Magainin's lead compound MSI-78.  The Company subsequently sold 225,000 
shares of the stock at a loss of approximately $534,000 in 1996.  The 
remaining shares were sold in January 1997 at a loss of approximately $88,000.

10. STOCKHOLDERS' EQUITY
  
  In April 1996, the Company completed its initial public offering of
approximately 3.8 million shares of common stock at $8.00 per share for net cash
proceeds of $27.3 million.  Upon closing of the initial public offering, shares
of the Company's preferred stock automatically converted into approximately 9
million shares of common stock.  Additionally, the Company redeemed 2.1 million
shares of the Company's Series One Preferred Stock for cash of approximately
$2.8 million (including cumulative dividends of $719,000.)

COMMON STOCK WARRANTS

  At December 31, 1998, the Company had outstanding warrants to purchase 
35,437 shares of its common stock at $4.52 per share and 8,118 shares of 
common stock at $5.91 per share, expiring on October 7, 2002 and June 21, 
2005, respectively. An aggregate of 43,555 shares of common stock have been 
reserved for issuance upon the exercise of the warrants.

STOCK INCENTIVE PLANS

  The Company is authorized to issue 6,032,221 shares of common stock to 
eligible employees, officers, directors and consultants. Of the authorized 
shares, 1,038,153 options were granted under the Company's 1992 Stock Option 
Plan and 1995 Stock Plan (the "Predecessor Plans") and 1,071,756 options were 
granted under the 1997 Stock Plan of NaviCyte.  In November 1998, pursuant to 
a Merger Agreement between the Company and NaviCyte, the Company assumed the 
1997 Stock Plan of NaviCyte.  In February 1996, the Board of Directors 
approved the 1996 Stock Plan (the "1996 Plan") under which an additional 
822,312 shares of common stock were reserved for issuance.  In the second 
quarter of 1997 and third quarter of 1998, the Company's Board of Directors 
and stockholders approved an additional 1.1 million and 2 million shares, 
respectively, of common stock for issuance under the 1996 Plan.  As of 
December 31, 1998, an aggregate of 5,176,718 shares of common stock have been 
reserved for issuance upon exercise of the options.
  
  The 1996 Plan provides for awards in the form of restricted shares, stock
units, options or stock appreciation rights.  The 1996 Plan replaces the
Predecessor Plans whereby shares available under the Predecessor Plans were
transferred to the 1996 Plan.  All outstanding options under the Predecessor
Plans will remain exercisable in accordance with their original terms, which are
substantially the same terms and conditions specified for option grants under
the 1996 Plan.  The 1996 Plan provides for the grant of incentive and
nonstatutory stock options.  Terms of the stock option agreements, including
vesting requirements, are determined by the Board of Directors.  The exercise
price of incentive stock options must equal at least the fair market value on
the date of grant and the maximum term of options granted is ten years.
  
  In February 1998, the Company's Board of Directors approved an exchange
program for certain stock options under the 1996 Plan.  Options having a price
greater than the closing price of the Company's stock, as reported by the Nasdaq
National Market, on the date of approval were eligible to participate; however,
options granted to executive officers, directors, consultants and advisors of
the Company were excluded from exchange.  There were 360,174 options eligible
for participation, which resulted in an effective repricing to an exercise price
of $3.375 (as well as the modification of certain terms).  Of the total
eligible, 237,768 options were repriced.  Eligible employees who elected to
participate were subject to a 12 month "no-vest" clause.  Following the 12 month
period, the vesting schedules reverted to their original vesting schedules prior
to participation in the exchange program.  


                                       F-13

<PAGE>

  A summary of the Company's stock option activity and related information for
the years ended December 31 follows:

<TABLE>
<CAPTION>

                                                 1998                              1997                             1996
                                      ---------------------------     ---------------------------     -------------------------
                                                       Weighted                         Weighted                       Weighted
                                                       Average                          Average                        Average
                                                       Exercise                         Exercise                       Exercise
                                       Options          Price           Options          Price           Options        Price
                                      ---------        --------        ---------        ---------      ----------    ----------
<S>                                   <C>            <C>              <C>            <C>              <C>                <C>
Outstanding at beginning of year      1,409,972      $      3.10      1,111,027      $      1.99        614,847      $   0.86
   Granted                            2,084,962             1.61        653,019             4.43        795,856          2.51
   Exercised                           (282,055)            0.50       (212,084)            1.76        (93,583)         1.07
   Forfeited                           (407,767)            4.04       (141,990)            3.74       (206,093)         1.02
                                      ---------                       ----------                      ----------
Outstanding at end of year            2,805,112      $      2.12      1,409,972      $      3.10      1,111,027      $   1.99
                                      ---------      ------------     ----------     -----------      ----------     ----------
                                      ---------      ------------     ----------     -----------      ----------     ----------
Exercisable at end of year            1,733,149                        643,965                          493,394
                                      ---------                       ----------                      ----------
                                      ---------                       ----------                      ----------
Weighted average fair value of
   options granted during the
   year                                  $ 2.72                       $     4.45                      $     3.97
                                      ---------                       ----------                      ----------
                                      ---------                       ----------                      ----------
</TABLE>

  The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>

                                                      Outstanding                  Exercisable
                                         --------------------------- ------------------------------------------
                                                                                                       Weighted
                                                       Remaining        Weighted                      Average
                                           Number      Contractual       Average          Number       Exercise
      Range of Exercise Prices          Outstanding        Life        Exercise Price    Exercisable    Price
--------------------------------------  -----------    -----------     ---------------   -----------   --------
<S>                                     <C>            <C>             <C>               <C>           <C>
          $0.0085 - $0.2059               850,966          8.55          $0.08            846,745       $0.08
          $0.3700 - $2.1500               720,407          7.08           1.63            518,027        1.45
          $2.5000 - $3.3750               760,138          8.95           3.32            180,138        3.37
          $3.4380 - $6.0000               473,601          8.27           4.61            188,239        4.64
                                         ---------                                       ---------
                                         2,805,112         8.23          $2.12           1,733,149      $1.24
                                         ---------         ----          -----           ---------      -----
                                         ---------         ----          -----           ---------      -----
</TABLE>

  The Company recorded approximately $2.2 million of deferred compensation for
options granted during the year ended December 31, 1996, representing the
difference between the option exercise price and the fair market value for
financial statement presentation purposes.  The Company is amortizing the
deferred compensation ratably over the vesting period of the options.

  Adjusted pro forma information regarding net income is required by SFAS 
123, and has been determined as if the Company had accounted for its employee 
stock options under the fair value method of that Statement.  The fair value 
of these options for the year ended December 31, 1998 was estimated at the 
date of grant using the "Black-Scholes" method for option pricing with the 
following weighted-average assumptions: risk-free interest rate of 5.32%; 
dividend yield of 0%; volatility of 1.0222; and a weighted-average expected 
life of the option of 1 year to 6 years.  The fair value of these options for 
the years ended December 31, 1997 and 1996 was estimated at the date of grant 
using the "Black-Scholes" method for option pricing with the following 
weighted-average assumptions: risk-free interest rate of 5.71%; dividend 
yield of 0%; volatility of .9168; and a weighted-average expected life of the 
option of 1 year to 6 years.

  For purposes of adjusted pro forma disclosures, the estimated fair value of 
the options is amortized to expense over the options' vesting periods.  
Because the SFAS 123 method of accounting has not been applied to options 
granted prior to January 1, 1995, the pro forma information may not be 
representative of that to be expected in future years.  The Company's 
adjusted pro forma information is as follows (in thousands, except for per 
share information):

                                       F-14

<PAGE>

<TABLE>
<CAPTION>

                                                                                          YEAR ENDED
                                                                                         DECEMBER 31,
                                                                       --------------------------------------------
       <S>                                                             <C>             <C>                <C>
                                                                             1998          1997             1996
       Adjusted pro forma net loss                                     $   (14,123)    $ (10,380)         $(12,321)
                                                                       -----------     ---------          ---------
                                                                       -----------     ---------          ---------
       Adjusted pro forma basic and diluted net loss per share         $      (.98)    $    (.76)         $  (1.00)
                                                                       -----------     ---------          ---------
                                                                       -----------     ---------          ---------

</TABLE>
                                                                    
EMPLOYEE STOCK PURCHASE PLAN

  In August 1998, the Board of Directors amended the Employee Stock Purchase 
Plan (the "Purchase Plan") under which an additional 150,000 shares of common 
stock were reserved for sale to eligible employees.  As of December 31, 1998, 
the Company had 178,837 shares available for future issuance under the 
purchase plan.  On January 1 or July 1, employees may enroll in the Purchase 
Plan and purchase stock over a six-month participation period valued at up to 
but not exceeding 10% of each employee's earnings.  The stock purchase price 
shall be the lesser of 85% of the fair market value of the stock on the last 
day before the participation period commences or 85% of the fair market value 
on the last day of the participation period.

11.  401(k) PLAN

  The Company has a 401(k) defined contribution savings and retirement plan 
(the "Plan").  The Plan is for the benefit of all qualifying employees and 
permits employee voluntary contributions of up to 15% of base salary (as 
defined) and elective Company matching contributions.  Company contributions 
to the Plan totaled $107,000, $80,000 and $66,000 for the years ended 
December 31, 1998, 1997 and 1996, respectively.

12.  INCOME TAXES

  As of December 31, 1998, the Company had federal and California income tax net
operating loss carryforwards of approximately $53,400,000 and $7,240,000
respectively.  The difference between the federal and California tax loss
carryforwards are primarily attributable to the capitalization of research and
development expenses for California income tax purposes, the 50% limitation on
California loss carryforwards, and the expiration of California loss
carryforwards.  The federal tax loss carryforwards will begin to expire in 2007
unless previously utilized.  Approximately $3,700,000 of California tax loss
carryforwards expired in 1998.  The California tax loss carryforwards will
continue to expire in 1999 unless utilized.  The Company also has federal and
California research and development tax credit carryforwards of $2,967,000 and
$1,525,000, respectively, which will begin to expire in 2007 unless previously
utilized.  Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and tax credit carryforwards may be limited due to
a cumulative change in ownership of more than 50% within a three-year period,
which occurred in April 1996.  However, the Company's management does not
anticipate that such limitation would materially affect the Company's ability to
utilize the net operating loss and tax credit carryforwards.

  Significant components of the Company's deferred tax assets are shown below. 
A valuation allowance of $25,223,000 has been recognized to offset the deferred
tax assets, as realization of such assets is uncertain.

<TABLE>
<CAPTION>

                                                             DECEMBER 31,
                                                          1998          1997
                                                     ------------    -----------
<S>                                                  <C>             <C>
Deferred tax liabilities:
    Developed technology                             $ (2,547,000)     $  --
                                                     ------------    -----------
Total deferred tax liability                           (2,547,000)        --

<CAPTION>
                                                               DECEMBER 31,
                                                           1998          1997
                                                     ------------   -------------
<S>                                                  <C>            <C>
Deferred tax assets:
   Net operating loss carryforwards                  $ 19,111,000    $ 16,350,000
   Research and development credits                     3,959,000       2,844,000
   Capitalized research and development                 1,800,000       1,429,000
   Deferred revenue                                     1,492,000       1,231,000
   Other, net                                           1,408,000         851,000
                                                     ------------    ------------

Total deferred tax assets                              27,770,000      22,705,000
Valuation allowance for deferred tax assets           (25,223,000)    (22,705,000)
                                                     ------------    ------------
Net deferred tax assets                              $         --    $         --
                                                     ------------    ------------
                                                     ------------    ------------
</TABLE>

                                       F-15

<PAGE>



13.  SUBSEQUENT EVENT (UNAUDITED)

  In March 1999, the Company sold substantially all the assets (valued at
approximately $110,000) of its wholly-owned subsidiary, ChromaXome Corp., to
TerraGen Discovery, Inc. ("Discovery"), a privately held company.  As
consideration for the sale, the Company received $2 million in cash, two
interest bearing notes in the amounts of $2 million and $1 million plus 600,000
shares of preferred stock in the parent of Discovery, which is also a privately
held company.  The two notes are due no later than December 31, 1999 and June
30, 2000, respectively, and may be accelerated in certain events.




























                                       F-16