<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999


                                       or

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

Commission File Number:  0-22669

                         AURORA BIOSCIENCES CORPORATION
           -----------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Delaware                                    33-0669859
----------------------------------           --------------------------
(State or other jurisdiction of              (I.R.S. Employer incorporation
     Identification No.)                            or organization)

  11010 Torreyana Road, San Diego, CA                 92121
-----------------------------------------      -------------------
(Address of principal executive offices)            (Zip code)


                                 (858) 404-6600
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


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

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

                         COMMON STOCK, PAR VALUE $0.001
                         ------------------------------
                                (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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in 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 Common Stock held by non-affiliates, based on the
last sale price as reported on the Nasdaq National Market on February 29, 2000,
was approximately $1.98 billion*.

The number of shares of registrant's Common Stock outstanding as of February 29,
2000 was 19,677,894.

DOCUMENTS INCORPORATED BY REFERENCE:

Registrant's proxy statement filed in connection with the solicitation of
proxies for its 2000 Annual Meeting of Stockholders is incorporated by reference
into Part III of this Form 10-K. Certain Exhibits filed with the Registrant's
Registration Statement Form S-1 (333-23407), Form 10-Q for the quarter ended
September 30, 1997, Form 10-K for the year ended December 31, 1997, Forms 10-Q
for the quarters ended June 30, 1998 and September 30, 1998, Form 10-K for the
year ended December 31, 1998 and Forms 10-Q for the quarters ended March 31,
1999, June 30, 1999 and September 30, 1999 are incorporated by reference into
Part IV of this Form 10-K.

--------------
* Excludes 1,209,174 shares of Common Stock held by directors, executive
  officers and stockholders whose ownership exceeds ten percent of the shares
  outstanding on February 29, 2000. Exclusion of shares held by any person
  should not be construed to indicate that such person possesses the power,
  directly or indirectly, to direct or cause the direction of the management or
  policies of the registrant or that such person is controlled by or under
  common control with the registrant.


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                                     PART I

THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING THE COMPLETION OF OUR ULTRA-HIGH THROUGHPUT SCREENING SYSTEM, OR
UHTSS-TM- PLATFORM, UTILIZATION AND CAPABILITIES OF OUR TECHNOLOGIES AND OUR
ABILITY TO INCREASE REVENUE AND ACHIEVE PROFITABILITY. THESE STATEMENTS, WHICH
SOMETIMES INCLUDE WORDS SUCH AS "EXPECT", "GOAL" OR "WILL", REFLECT OUR
EXPECTATIONS AND ASSUMPTIONS AS OF THE DATE OF THIS ANNUAL REPORT BASED ON
CURRENTLY AVAILABLE OPERATING, FINANCIAL AND COMPETITIVE INFORMATION. OUR ACTUAL
RESULTS AND FINANCIAL PERFORMANCE MAY DIFFER MATERIALLY. FACTORS THAT COULD
CONTRIBUTE TO DIFFERENCES INCLUDE RISKS INVOLVED WITH OUR NEW AND UNCERTAIN
TECHNOLOGY, RISKS ASSOCIATED WITH THE DEPENDENCE ON PATENTS AND PROPRIETARY
RIGHTS, THE ABILITY TO ATTRACT ADDITIONAL COLLABORATIVE PARTNERS, DEPENDENCE ON
EXISTING PHARMACEUTICAL AND BIOTECHNOLOGY COLLABORATIONS AND THE DEVELOPMENT OR
AVAILABILITY OF COMPETING SYSTEMS. THESE FACTORS AND OTHERS ARE MORE FULLY
DESCRIBED IN "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K. WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.

ITEM 1. BUSINESS

OVERVIEW

     We design, develop and commercialize advanced drug discovery technologies,
services and instrumentation to accelerate the discovery of new medicines, the
principal components of which are our genomics, assay and automated system
technologies. Our technology platform provides an advanced way to identify
commercially useful targets, enable rapid assay development and rapidly test
compounds for use as potential new medicines that act upon those targets. Thus,
our technology is designed to address the most significant new bottlenecks in
the drug discovery process. We are launching a proprietary large-scale biology
program to identify proteins involved in disease, or targets, rapidly
incorporate these targets into tests, or assays, that measure activity in
targets and then rapidly screen hundreds of thousands of compounds against these
assays to identify potential drugs. Our ultra-high throughput screening system,
known as the UHTSS, is designed to screen over one hundred thousand compounds
per day against targets. We believe many of our technologies have been
commercially validated by over fifteen major pharmaceutical and biotechnology
companies in the form of commercialization agreements.

     We believe our technologies will enable us and our customers to take
advantage of recent advances in genomics and chemistry that have the potential
to alter fundamentally the development of human medicine. It has been estimated
that the human genome contains at least 140,000 genes, of which approximately
10,000 may be important pharmaceutical targets in the treatment of diseases. We
believe that identifying the function of these genes is a key step in the
discovery of new medicines. However, using conventional methods, developing an
understanding of the function of each gene and its role in disease may take many
years.

     Our assay development technologies can rapidly convert targets identified
through genomics into assays. We are able to incorporate targets from many
target classes into living human cells without the assay development delays
associated with conventional methods, Our technology also permits scientists to
tag genes in the genome inside of living human cells. Through this method
scientists can identify cells containing disease-related genes in less than one
day in most cases. The same technology also permits rapid assay development
based on those cells for testing against large numbers of compounds that alter
the activity of those genes. These technologies, combined with our existing and
future automated screening capabilities, will help us achieve our goal of
offering gene-to-lead discovery programs in a broad range of different
therapeutic areas.

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     An important element of our strategy includes commercial acceptance of our
technologies through revenue generating relationships with major pharmaceutical
and biotechnology companies. We have commercial agreements for one or more of
our technologies through services, licenses or sale of systems with:

- American Home Products
- Becton Dickinson
- Bristol-Myers Squibb Co.
- Eli Lilly and Company
- F. Hoffman-LaRoche Ltd.
- Glaxo Wellcome plc
- Merck & Co., Inc.
- Pfizer, Inc.
- Pharmacia & Upjohn, Inc.
- Roche Bioscience
- Warner Lambert Company
- Acacia Bioscience
- Allelix Biopharmaceuticals, Inc.
- Anticancer, Inc.
- Clontech Laboratories, Inc.
- Cystic Fibrosis Foundation
- Cytovia, Inc.
- Exelixis, Inc.
- Genentech, Inc.
- National Cancer Institute
- Rigel, Inc.

BACKGROUND

     The discovery and development of new medicines can be expensive,
time-consuming and highly inefficient. The initial phase of the drug development
process, termed discovery, is the early stage prior to clinical development of a
drug candidate. Drug discovery is typically a serial process that involves:

     - defining the disease of interest;

     - identifying and validating a target or protein related to a disease;

     - developing an assay that portrays a human disease for the target;

     - testing thousands of chemical compounds against the target, referred to
       as screening; and

     - identifying compounds, or hits, that affect target activity.

     Recent advances in the study of the human genome have increased the focus
on identifying targets to be used in assays for the discovery of potential new
medicines. It has been estimated that the human genome contains at least 140,000
genes, of which approximately 10,000 may be important pharmaceutical targets in
the treatment of diseases. These targets are clustered in specific classes of
genes for major diseases, including:

     - receptors, or proteins that recognize molecules that act as signals in
       the human body; and

     - ion channels, or proteins that create passages for electrically charged
       molecules, to enter and exist cells.

     While it is further estimated that at least 2,000 targets exist from the
receptor and ion channel family of genes alone, current commercially available
drugs are directed to less than 500 gene targets.

     One of the major historical bottlenecks in the drug discovery process has
been the screening of compounds against targets to identify potential new
medicines. In recent years, however, this bottleneck has been slowly alleviated
as advances in screening technologies have enabled scientists to screen up to
100,000 compounds per day, a dramatic increase over conventional technologies
available only five years ago.

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<PAGE>   4
NEW PROBLEMS IN THE DISCOVERY PROCESS: ASSAY DEVELOPMENT

     A new bottleneck has developed in the discovery process because of the
expanded number of genes available as potential targets. Pharmaceutical and
biotechnology companies now face the challenge of efficiently and effectively
converting targets into productive assays. For newly discovered targets, little
information is known about the protein and often no efficient technologies are
available to permit functional studies that are a prerequisite for conventional
assay development. For already established target classes, current assay
development technologies can be slow, cumbersome, or may require extensive
scientific training and complex instrumentation. When an assay system is
developed, it is frequently designed to apply only to a small target class or
even a single target and is often not suitable for high throughput screening.

     The recent scale-up from testing thousands of samples per day to hundreds
of thousands of samples per day has created a logistical problem for sample
preparation and compound management. We believe many current approaches are
inefficient and wasteful. In addition, we believe when potential solutions exist
to these and other screening problems, they typically use assorted technologies
that are incompatible or difficult to use or integrate with existing screening
platforms. Since most potential solutions are not integrated and would require
continuing development to implement and integrate, many pharmaceutical companies
are reluctant to adopt new technologies, despite the potential for large
benefits. Furthermore, when assay technologies are adopted, they are typically
developed for a specific department or therapeutic area, so that when an assay
technology can be re-applied in a new area, it has to be re-adapted -- thus
gaining no operational leverage. Finally, some classes of targets, such as
receptors without a known function, ion channels, and enzymes controlling cell
activation, are inherently difficult for assay technologies to conveniently
address. As a result of all of these factors, we believe a key bottleneck in the
drug discovery process has shifted from screening for potential new medicines to
converting targets into assays.

THE AURORA SOLUTION

     We believe that our technology portfolio provides a revolutionary way to
identify commercially useful targets and enables the rapid testing of compounds
to be used as potential new medicines against targets. Our key capabilities
include:

    Cell-Based Assay Development for Therapeutically Relevant Target
    Classes. Our expertise in this area allows us to develop many assays in a
    matter of four to six weeks, rather than a period of months using
    conventional methods, for classes such as receptors and ion channels.

    Assays to Rapidly Measure Target Activity in Living Cells. In the ion
    channel area we can detect the activity of ion channels in cells at sample
    processing rates which exceed the current comparable standard by 100 to 1000
    fold.

    Advanced Screening Systems Incorporating Miniaturization, Microfluidics and
    Compound Management. Our UHTSS is designed to test over 100,000 compounds in
    individual small volume assays per day.

    Integration of Our Proprietary Biology, Chemistry and Instrumentation to
    Provide New Processes for Evaluating and Testing Targets. We provide
    integrated solutions to our customers, such as our VIPR technology,
    comprising biology, chemistry and instrumentation.

                                       4
<PAGE>   5
     We believe that our technology offers significant advantages over
conventional approaches to discovering new medicines through the use of the
human genome. We believe these advantages include:

    Speed. Our technologies enable rapid screen development and ultra-high
    throughput screening. Technologies that accelerate drug discovery include
    our GenomeScreen, GeneBlazer, VIPR, and UHTSS.

     Commercial Validation. We have successfully completed the development of
     over 100 assays. Over 15 leading pharmaceutical and biotechnology companies
     use our services or technology.

     Breadth. Our technologies support discovery programs for most of the
     currently recognized major target classes that are treated with marketed
     medicines.

     Productivity. Our discovery processes can be very efficient, allowing for
     reduced personnel and time requirements when compared to traditional
     approaches that convert targets to assays.

     Enabling. Several of our technologies facilitate drug discovery on targets
     that are otherwise difficult to use in the discovery process. For example,
     GeneBlazer technology enables scientists to work with difficult targets,
     such as receptors with an unknown function.

     Accuracy. We provide efficient and accurate solutions to assay development
     issues. For example, our VIPR technology improves the accuracy and
     efficiency of ion channel screens compared to conventional technologies.

STRATEGY

     Our goal is to be the leader in exploiting the human genome for the
discovery of potential new medicines. The key elements of our strategy include:

     Launch Large Scale Biology Program. We are initiating a large scale biology
program designed to use our patented assay technology to rapidly test a large
number of targets from the human genome against hundreds of thousands of
compounds. This program will leverage many aspects of our existing business,
including assay development, genomics, compound collections, screening and
systems. We intend to commercialize this program by licensing access to
information and leads and entering into alliances for our discovery services
with companies that develop and sell medicines.

     Provide Innovative Discovery Services. We will continue to establish target
identification and validation and drug discovery alliances utilizing our
proprietary human cell-based genomics technologies. Our GenomeScreen technology
allows us to tag genes in the human genome inside of living human cells and
identify cells with disease-related genes in most cases in less than one day.
The same technology also permits rapid assay development based on those
identified cells for testing against large numbers of compounds to alter the
activity of those genes. We also intend to focus on the commercialization of
specific classes of target assay development and screening technologies through
our VIPR and GeneBlazer Technologies. Our goal is to offer gene-to-lead
discovery programs in a broad range of different therapeutic areas.

     Expand Informatics Tools and Databases. Utilizing our assay technologies
and the UHTSS, we expect to generate large amounts of complex information on
targets and chemical structures. The analysis of these datasets will require the
use of innovative database and data analysis tools. We intend to develop these
information technology applications either directly or in collaborations with
leaders in the areas of molecular imaging software development, datamining
applications, bioinformatics, and database architecture.

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     Maintain Technology Leadership. We intend to continue advancing our core
technologies and expanding our technology leadership position by continuing to
invest heavily in research and development and acquiring access to strategic
technologies or capabilities. We have assembled a unique multi-disciplinary team
of scientists from leading companies in the pharmaceutical, chemistry,
instrumentation, automation and computer science industries. We will also
continue to form strategic technology alliances with leading companies from
these industries and with leading academic institutions to provide us with
access to those parties' technologies and expertise.

     Expand Licensing Program. We will continue to license our intellectual
property to generate revenues and obtain access to third parties' intellectual
property. To date we have granted non-exclusive licenses to our fluorescent
protein technology to over ten pharmaceutical and biotechnology companies. We
will continue to aggressively seek to license our fluorescent protein
technologies and other technologies, including for use in new, unlicensed fields
such as agriculture, diagnostics and environmental testing.

     Support and Enhance the UHTSS Platform. We have established a group of
collaborators to co-develop our UHTSS. Our UHTSS collaborative partners
currently consist of Bristol-Myers, Merck, Pfizer and Warner Lambert. Our UHTSS
collaborators have provided funding for the development of the UHTSS and are
entitled to co-exclusive access to the system. We intend to seek as many as two
additional UHTSS collaborative partners and to continue to upgrade, enhance and
offer additional services based on our UHTSS. We believe we will be able to
leverage our base of collaborators by providing new products and services as we
expand the UHTSS technology or develop enhancements to the system.

PRODUCTS AND SERVICES

     We are commercializing the following technologies that allow us to provide
genomics, assay development and screening services and products:

     - GeneBlazer Technology. GeneBlazer is a patented technology that allows
       the rapid development of assays to test targets, such as receptors, using
       small samples. Using GeneBlazer, we have developed over 50 assays
       relating to therapeutic areas, including metabolic and central nervous
       system diseases.

     - GenomeScreen System. Our GenomeScreen system identifies targets by
       scanning the genome of living human cells. This patented technology also
       permits rapid assay development for testing large numbers of compounds to
       determine their affect on the activity of those targets or genes.

     - VIPR Technology. Our VIPR technology enables the rapid development of
       assays and screening of ion channel targets. Using this patented assay
       and screening technology, we have developed over 25 assays relating to
       therapeutic areas including cardiac, metabolic and nervous system
       diseases.

     - Fluorescent Protein Technology. Our fluorescent protein technology allows
       the monitoring of cellular processes and target activity using
       fluorescent proteins.

     - UHTSS Technology. The UHTSS is a suite of automated products designed to
       enable rapid processing and testing of large numbers of compounds in
       small volumes. In 1999, we received our first patent protecting the UHTSS
       and we ran our first 100,000 data point cell-based assay in less than
       twelve hours.

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<PAGE>   7
     - AMCS Technology. The AMCS is a large-scale, automated, compound inventory
       management system. The AMCS allows compounds to be stored in various
       formats under controlled environmental conditions.

OUR TECHNOLOGY

     The principal components of our integrated technology platform are our
proprietary genomics, assay and automated system technologies. This unique
platform results from our innovative integration of many different disciplines,
including:

<TABLE>
<S>                 <C>
- chemistry         - engineering
- physics           - microfluidics, movement
                      of small volumes of fluids
- biology           - software
</TABLE>

Assay Technologies.

     We believe that our broad portfolio of proprietary assay technologies
provides significant advantages over existing screening assays. Our assay
technologies use light signals emitted from fluorescent molecules to reveal
molecular and cellular function and activity with precision and sensitivity. In
contrast to purely biochemical assays, these cell-based assays provide
information about compounds acting within the biologically relevant environment
within living cells.

     Our assay technologies are designed to enable screening of compounds
against nearly all major classes of targets in most therapeutic areas. We have
developed numerous assays in several target classes utilizing our fluorescence
assay technologies. We expect to generate revenues with our fluorescent assay
technologies by providing services, instrumentation, licenses and consumables,
such as laboratory supplies.

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     The following table summarizes many of our key fluorescence assay
technologies, together with examples of the classes of targets, therapeutic
areas and potential sources of revenue to which they may be applicable:

<TABLE>
---------------------------------------------------------------------------------------------------
                                                             POTENTIAL                 POTENTIAL
            TECHNOLOGY             TARGET CLASS          THERAPEUTIC AREA           REVENUE SOURCES
---------------------------------------------------------------------------------------------------
<S>                                <C>            <C>                               <C>
  GENEBLAZER                       receptors      cancer                            services
  (cell-based assays and target    enzymes        cardiovascular                    licenses
  identification)                                 pain and inflammation             consumables
                                                  nervous system
                                                  metabolic diseases
---------------------------------------------------------------------------------------------------
  GENOMESCREEN                     receptors      inflammation                      services
  (cell-based assays)              proteins       cancer                            licenses
                                   that           metabolic diseases                consumables
                                   modulate
                                   cell
                                   function
---------------------------------------------------------------------------------------------------
  VIPR                             ion channels   cardiovascular                    services
  (cell-based assays)                             nervous system                    licenses
                                                  pain and inflammation             consumables
                                                  gastro-intestinal                 instrumentation
---------------------------------------------------------------------------------------------------
  FLUORESCENT PROTEINS             receptors      cancer                            services
  (cell-based assays)              enzymes        cardiovascular                    licenses
  (biochemical assays)                            pain and inflammation             consumables
                                                  nervous system
---------------------------------------------------------------------------------------------------
  UNIVERSAL G-PROTEINS             receptors      cancer                            services
  (cell-based assays)                             cardiovascular                    licenses
                                                  pain and inflammation             consumables
                                                  nervous system
                                                  metabolic diseases
---------------------------------------------------------------------------------------------------
  PHOSPHORYLIGHT(TM)               enzymes        cancer                            services
  (biochemical assays)                            nervous system                    licenses
                                                  pain and inflammation             consumables
                                                  metabolic diseases
---------------------------------------------------------------------------------------------------
</TABLE>

     GeneBlazer Technology. GeneBlazer technology can be used to construct
assays within living cells for a number of major classes of targets. These
cell-based assays have a number of advantages over many conventional assays. For
example, GeneBlazer allows assays to be conducted in living mammalian cells
designed to mimic human biology and does not require the use of radioactivity.

     GenomeScreen Technology. Our GenomeScreen technology is used to identify
disease-related genes in cells and rapidly create assays. Using GenomeScreen,
researchers randomly tag individual genes inside of living human cells. When a
tagged gene is active in the cell, it produces blue light from the GenomeScreen
tag. Inactive, tagged genes produce green light. Cells with tagged genes
producing blue and green light can be separated at ultra-high throughputs of
over 60 million cells an hour. These throughputs permit sorting up to 500
million cells in a single day to identify cells with disease-related genes. Thus
scientists can scan the entire human genome in less than one day most cases.
GenomeScreen also permits rapid assay development for testing of hundreds of
thousands of compounds and eliminates additional time-consuming steps required
to convert a gene into an assay suitable for automated ultra-high throughput
testing.

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     GeneBlazer has been commercialized in alliances by providing services and
licenses to seven pharmaceutical companies:

<TABLE>
  <S>                             <C>                    <C>
  - Bristol-Myers                 - Merck
  - Eli Lilly                     - Pfizer
  - F.Hoffman-LaRoche             - Pharmacia & Upjohn
  - Warner Lambert
</TABLE>

     We believe GeneBlazer has the potential to greatly reduce both the time and
cost of developing cell-based screens because of its ability to measure the
function of a target in a single living cell. Even with modern techniques for
making genetically engineered cells, cell line development for assays can be
unpredictable and is often a rate limiting step in the discovery process.
Standard methods for making cell lines usually take many months and involve
testing hundreds or even thousands of identical cells to generate a usable
assay. In contrast, GeneBlazer uses fluorescence-based cell sorting, which can
rapidly isolate the living cells in which GeneBlazer measures target activity.
Thus, GeneBlazer may reduce assay development time from months to weeks. To
date, we have developed over 50 assays using GeneBlazer.

     VIPR Technology. Our VIPR enables scientists to rapidly develop assays and
screen ion channels in living human cells. Quality screening in this area has
traditionally been limited to testing compounds with an electrical measuring
apparatus, which requires special skills and has a low throughput. We believe
the VIPR represents an important advance in the ability to find new medicines
for cardiac, metabolic and nervous system related diseases. Our patented VIPR
technology can increase the rate of identification of potential new medicines
100 to 1,000 fold compared to conventional technologies. To date, we have
developed 25 assays using this technology and have entered into alliances with
the following pharmaceutical companies relating to VIPR:

<TABLE>
  <S>                             <C>                    <C>
  - American Home Products        - Merck
  - Bristol-Myers                 - Pfizer
  - Glaxo Wellcome
</TABLE>

     Fluorescent Protein Technology. Our fluorescent protein technology is
derived from a fluorescent protein that occurs naturally in jellyfish. The
fluorescent protein can be used to monitor the activity of cellular processes
and proteins in mammalian cells. We have a co-exclusive licensing agreement with
Clontech Laboratories, Inc. to commercialize components of this technology,
including non-commercial academic research uses. We have licensed this
technology for specified drug discovery purposes to a number of major
pharmaceutical and biotechnology companies, including:

<TABLE>
  <S>                             <C>                    <C>
  - Exelixis                      - Rigel, Inc.
  - Genentech
</TABLE>

     Universal G-protein Technology. Our patented universal G-protein technology
enables scientists to measure the activity of different kinds of receptors in
living human cells. This technology can help identify the function of receptors
without previously known function. We believe this represents an important
advance in developing assays from human genome information. We announced a
genomics collaboration in 1999 with Pharmacia & Upjohn involving the development
of assays for a number of receptors without known function. We have entered into
a number of alliances with pharmaceutical companies relating to this technology,
including:

<TABLE>
  <S>                             <C>                    <C>
  - Bristol-Myers                 - Merck
  - F.Hoffman-LaRoche             - Pfizer
  - Eli Lilly                     - Warner Lambert
</TABLE>

                                       9
<PAGE>   10
     Phosphorylight(TM) Technology. Our patented Phosphorylight technology
enables the development of assays to measure the activity of enzymes controlling
cellular activity. These enzymes are significant therapeutic targets for a wide
range of diseases including cancer, inflammation, nervous system conditions and
metabolic diseases. We believe that this technology considerably expands the
range of assays that can be performed using the UHTSS.

     MetaboLight(TM) Technology. We have developed a range of proprietary assays
to measure the activity of liver enzymes that can metabolize compounds
administered to humans. Our assays can be used for screening compounds in drug
discovery for potential interactions with human liver enzymes. We believe that
this screening can reduce the cost of drug discovery by early identification of
compounds which might have adverse side effects.

Automated Screening Technologies

     Our ultra high-throughput screening system, or UHTSS, is designed as a
modular assembly of screening components to process and test hundreds of
thousands of compounds in small volume assays in an automated fashion. The UHTSS
technology is designed to provide a novel solution for the integration of
compound handling, storage and screening. In 1999 we ran our first 100,000
datapoint cell-based assay in less than twelve hours using individual components
of our UHTSS in a standalone fashion. We expect to have a fully integrated UHTSS
operational in 2000. We have developed and commercialized our UHTSS technology
through four multi-year alliances for licenses, the supply of consumables, and
supply of instrumentation to Bristol-Myers, Merck, Pfizer, and Warner Lambert.

     The UHTSS components include:

     - NanoPlate(TM) Technology. The NanoPlate is a patented small volume
       screening format 36 times more dense than most conventional formats. We
       believe the NanoPlate permits higher density screening, faster automated
       processing and lower cost of consumables, such as reagents.

     - NanoWell(TM) Plate Reader. The NanoWell Plate Reader is a proprietary
       detector designed to measure fluorescence from small volumes with speed,
       accuracy and sensitivity. When used with the NanoPlate, it can measure
       over 200,000 small volume samples in less than one hour. Each sample may
       contain as few as 100 living human cells. We believe that this is the
       optimal sample size and that further miniaturization is unnecessary and
       may reduce the accuracy and reliability of the tests. The NanoWell Plate
       Reader is also designed to be used with other conventional plate formats.

     - Compound Storage and Retrieval: UHTSS Compound Store. The UHTSS Compound
       Store is an automated storage and retrieval system designed to house
       compounds and provide in solution for rapid access and screening. The
       system is designed to deliver and return over 100,000 selected compounds
       per day for primary screening and over 2,000 hits for re-test and potency
       determination.

     - Microfluidics: Compound and Assay Component Dispensing. We have developed
       proprietary dispensing technologies to accurately transfer microscopic
       volumes of test compounds, reagents and living cells at rates of up to
       10,000 wells per hour. While current screening systems can dispense
       volumes down to a one millionth of a liter, our microscopic volume
       screening dispensers are capable of volumes less than one billionth of a
       liter. These dispensers use advanced robotics to remove compounds and
       reagents from the storage plates and containers and dispense precise
       volumes at high speed.

     - Data Collection and System Integration. We are developing a user-friendly
       computer control system to link the storage and retrieval component of
       the UHTSS to chemistry

                                       10
<PAGE>   11
       information databases and compound inventories. This proprietary software
       is designed to efficiently capture, process and deposit in a centralized
       database the large amount of screening data generated from the UHTSS.

Automated Master Compound Store and Compound Collection

     We are developing an automated master compound store, or AMCS. The AMCS is
a modular storage system designed for long-term storage and retrieval of
chemical libraries under environmental control. The design provides for
monitoring systems to track compound utilization, expiration and availability of
individual compounds. Other features of the AMCS include a semi-automated
weighing subsystem to handle compounds in solid, powder and frozen form, and
automated subsystems for handling liquid samples. These systems are currently
being developed for delivery to Pfizer and Warner Lambert.

     We currently have a growing proprietary library containing over 400,000
chemical compounds for screening against our targets and our customers' targets.
The library is composed of individually stored and accessed compounds that will
be stored in our AMCS. These compounds have been carefully selected to maximize
chemical diversity and to increase the likelihood of identifying therapeutic
leads. Approximately 100,000 of our existing compounds are conventionally
synthesized compounds, while the remaining 300,000 compounds are produced by
combinatorial chemistry methodologies.

CORPORATE COLLABORATIONS

     We have entered into a number of corporate collaborations for the
co-development of our UHTSS and AMCS and for assay development, genomics and
screening services and technology. Our material collaborations are discussed
below:

Services and Platform System Agreements

     We have entered into four agreements for the development of the UHTSS and
two agreements for the development and delivery of our AMCS. Our UHTSS
agreements provide in general that we will deliver and install three separate
modules of the UHTSS system and provide service and support of the system for a
period following acceptance of the UHTSS. In return, our UHTSS collaborative
partners are obligated to make specified fees to us in the form of
non-refundable fees, installation payments, and ongoing research and
co-development funding. Some of our UHTSS agreements restrict our UHTSS
syndicate to six members for a limited period. In some cases, members of our
UHTSS syndicate may withdraw from the development of the UHTSS at any time
without cause. The complexity of developing the UHTSS has led to unexpected
delays in the delivery of integration software to Bristol-Myers. Similarly, the
complexity of the AMCS has led to delays in the delivery of the AMCS to Warner
Lambert.

     We have UHTSS syndicate agreements with Bristol-Myers, Warner Lambert,
Merck and Pfizer and AMCS development agreements with Warner Lambert and Pfizer.

     Bristol-Myers. In November 1996, we entered into a Collaborative Research
and License Agreement with Bristol-Myers regarding the development of the UHTSS
and the installation of the UHTSS at Bristol-Myers. In addition, the
collaboration includes co-development of high throughput screening assays for
use by Bristol-Myers in exchange for specified fees from Bristol-Myers and we
have licensed to Bristol-Myers the right to use our fluorescence assay
technologies for internal research and drug development, including the
development of screening assays. Bristol-Myers will make specified milestone and
royalty payments to us principally for compounds developed and commercialized by
Bristol-Myers, which are identified using a screen that we developed.

                                       11
<PAGE>   12
     Warner Lambert Company. In September 1997, we entered into a Collaborative
Research and License Agreement with Warner Lambert regarding the development of
the UHTSS and the installation of the UHTSS at Warner Lambert. The collaboration
includes co-development of high throughput screening assays for use by Warner
Lambert in exchange for specified fees from Warner Lambert. In addition, we have
licensed to Warner Lambert the right to use specified aspects of our
fluorescence assay technologies for internal research and drug development,
including the development of assays. Warner Lambert will also make specified
milestone and royalty payments to us for selected compounds developed and
commercialized by Warner-Lambert which were identified using an assay employing
the licensed technologies.

     In September 1998, we entered into a separate agreement with Warner Lambert
for the development of an AMCS. In January 1999, we entered into an amendment of
the Collaborative Research and License agreement with Warner Lambert for
services and licenses for specified aspects of our GenomeScreen technology.

     Merck & Co., Inc. In December 1997, we entered into a Collaborative
Research and License Agreement with Merck for the development of the UHTSS and
the installation of the UHTSS at Merck. The collaboration includes
co-development of high throughput screening assays for use by Merck in exchange
for specified fees from Merck. We have also licensed to Merck the right to use
specified aspects of our fluorescence assay technologies for internal research
and drug development, including the development of assays.

     In December 1999, we entered into two additional collaborations with Merck
in the area of genomics. Under each collaboration agreement, we will utilize
aspects of our GenomeScreen technology to investigate cell processes and gene
function related to selected Merck therapeutic programs. Merck will receive a
license to use the data and materials resulting from the program in basic
research and drug discovery. We received upfront payments from Merck for the new
collaborations, with the potential for additional research support fees, as well
as provisions for additional revenues in the event that drugs developed are
commercialized as a result of the collaboration.

     Pfizer, Inc. In June 1999, we entered into a Collaborative Research and
License Agreement with Pfizer regarding the development of the UHTSS and the
installation of the UHTSS at Pfizer. The agreement also calls for the
development and installation of an AMCS. The collaboration includes the
co-development of high throughput screening assays for use by Pfizer and we have
also licensed to Pfizer the right to use specified aspects of our fluorescence
assay technologies for internal research and drug development, including the
development of assays.

Services and Focused Discovery Systems Agreements

     Glaxo Wellcome. In December 1999, we entered into a three-year agreement
with Glaxo Wellcome in the area of ion channel drug discovery. We will provide
Glaxo Wellcome access to our ion channel technology, including our VIPR
instrument, our proprietary voltage sensor dyes and related assay technology. We
will develop assays, deliver instrumentation and provide ongoing scientific and
technical support to Glaxo Wellcome in exchange for specified payments, as well
as provisions for additional revenues in the event that drugs developed as a
result of the collaboration are commercialized.

     American Home Products. In December 1999, we announced a five-year
agreement with Wyeth-Ayerst Laboratories, the Pharmaceutical Division of
American Home Products Corporation, in the area of ion channel drug discovery.
We will provide Wyeth-Ayerst access to our ion channel technology, including our
VIPR instrument, our proprietary voltage sensor dyes and related assay
technology. We will develop assays, deliver instrumentation and provide ongoing
scientific and technical support to Wyeth-Ayerst in exchange for specified
payments.

                                       12
<PAGE>   13
The agreement also provides for additional revenues in the event that drugs
developed are commercialized as a result of the collaboration.

     Pharmacia & Upjohn, Inc. In February 1999, we entered into an agreement
with Pharmacia & Upjohn to provide assay development and screening services to
Pharmacia & Upjohn. Pharmacia & Upjohn funds an assay development team at our
facilities that utilizes our fluorescence assay technology to develop assays for
a number of receptors identified by Pharmacia & Upjohn's genomics program but
which have no known function. We also screen compound libraries provided by
Pharmacia & Upjohn to identify compounds, using our proprietary screening
systems for a separate fee. We could receive research and development
milestones, as well as royalties, on compounds identified by assays generated
through the collaboration.

     F. Hoffman-LaRoche. In February 1999, we entered into an agreement with
Hoffman-LaRoche to provide an assay development and technology transfer to
Hoffman-LaRoche for up to twelve Hoffman-LaRoche targets for assay development
in the first year. Hoffman-LaRoche is obligated to make the payments for assay
development and technology transfer services and licenses, milestone payments
for compounds identified through assays generated under the collaboration, and
royalties if compounds are commercialized.

     Becton Dickinson. In March 1999, we entered into an agreement with Becton
Dickinson to utilize our GenomeScreen technology for the identification of genes
useful as drug screening targets. We receive research funding and Becton
Dickinson instrumentation in support of our services, and the parties will
evaluate opportunities for future commercialization.

     Cytovia, Inc. In July 1998, we entered into a collaboration with Cytovia
under which we will provide our high throughput proprietary screens, compound
library and informatics capabilities and Cytovia will provide its proprietary
fluorogenic protease substrates for screening. We will conduct screening
programs to identify new drug leads. Cytovia will receive rights to develop and
commercialize any new drug leads identified as a result of the collaboration. We
receive fees from Cytovia for compound access and screening, and could receive
development milestones as well as royalties if compounds identified under the
collaboration are developed and commercialized. We also purchased shares of
Cytovia preferred stock.

     Eli Lilly. In December 1996, we entered into a Collaborative Research and
License Agreement with Eli Lilly regarding the development of the UHTSS and the
installation of the UHTSS at Eli Lilly. In November 1999, both parties agreed to
amend the agreement to refocus the collaboration on our assay technology and
focused discovery systems and discontinue further development and delivery of
Eli Lilly's customized UHTSS. The collaboration includes the co-development of
high throughput screening assays for use by Eli Lilly in exchange for specified
fees from Eli Lilly and we have licensed to Eli Lilly the right to use specified
aspects of our fluorescence assay technologies for internal research and drug
development, including the development of screening assays. Eli Lilly will also
make specified milestone and royalty payments to us principally for compounds
developed and commercialized by Eli Lilly which were identified using a screen
developed under the agreement.

TECHNOLOGY LICENSING

     In 1999, we entered into five technology licensing agreements under aspects
of our fluorescent protein patents, including one settlement agreement with
AntiCancer, Inc. concerning a patent infringement suit that we initiated. We
also granted licenses to:

     - Clontech Laboratories, for the right to sell certain fluorescent protein
       products as a research reagent;

                                       13
<PAGE>   14
     - Exelixis Pharmaceuticals, for the right to use fluorescent protein
       technology in certain pharmaceutical, animal health and non-plant
       agricultural applications;

     - Genentech, Inc., for certain research applications and the right to use
       fluorescent protein technology for the manufacture of therapeutic
       proteins; and

     - ZymoGenetics, Inc., for the right to use fluorescent protein technology
       for certain internal applications.

     In February 2000, we also granted Rigel, Inc. a license to use our
fluorescent protein technology for applications in connection with their own
proprietary technologies. In addition to an upfront payment, shares of Rigel
Preferred Stock and an option to a suite of Rigel's genomics technologies,
Aurora receives annual license payments from Rigel.

PATENTS AND PROPRIETARY RIGHTS

     Our patent portfolio includes over 120 patent applications filed in the
United States and foreign patent jurisdictions. We are either the assignee or
exclusive licensee of these patent rights, including 21 issued patents on our
instrumentation and plate technology, fluorescent protein technology,
ion-channel technology, GenomeScreen and GeneBlazer technology, as well as 14
allowed applications on these and other technologies. Aspects of our technology
related to fluorescent protein reporters and ion channel technologies are
exclusively licensed from The Regents of the University of California. Pursuant
to the terms of the Exclusive License Agreement between us and The Regents of
the University of California, we are obligated to pay expenses associated with
patent prosecution and maintenance, specified license issue fees and royalties
to The Regents. Aspects of our technology related to fluorescent protein
reporters are exclusively licensed from the University of Oregon. Pursuant to
the terms of the License Agreement between us and the University of Oregon, we
are obligated to pay to the University expenses associated with patent
prosecution and maintenance, specified annual payments and, upon the issuance of
a patent related to the subject technology, to issue shares of our common stock
to the University of Oregon. Aspects of our technology related to universal
G-protein technology reporters are exclusively licensed from the California
Institute of Technology for our payment of certain expenses associated with
patent prosecution and maintenance, and issuance of shares of our common stock.

     In March 1999, we filed an action against AntiCancer, Inc. alleging that
AntiCancer infringed specific patents by employing our patented fluorescent
protein technology in their business. The suit was settled in September 1999.
Under the terms of the settlement agreement, we received an upfront payment and
will receive annual payments, as well as specified royalty payments, from
AntiCancer in exchange for granting AntiCancer specified rights to use our
fluorescent protein technology.

     We have a non-exclusive license from SIBIA Neurosciences, Inc., with
specified rights to sublicense, under patent rights covering transcription-based
assay technology for screening. Pursuant to the terms of the Non-Exclusive
Cross-License Agreement between us and SIBIA, we granted SIBIA a non-exclusive
license to certain of our technologies, and we issued shares of our common stock
to SIBIA. We and SIBIA are also obligated to pay each other specified royalties.
In September 1999, SIBIA was acquired by Merck.

     We have a non-exclusive license and certain sub-licensing rights to OSI
Pharmaceuticals, Inc.'s issued reporter gene patent and options to OSI's Methods
of Modulation patent, for which the U.S. Patent Office has allowed claims. Under
the agreement, OSI received shares of our common stock and a cash payment and
OSI will also receive revenues from any sub-licenses granted by us to our
pharmaceutical partners, plus annual fees and milestone and royalty payments
under pre-agreed terms from any option taken by us or our partners to

                                       14
<PAGE>   15
develop small molecule gene transcription modulators encompassed by the Methods
of Modulation claims.

     We are dependent on the rights licensed from these parties. Any challenge
to, invalidation or loss of our licensed rights could have a material adverse
effect on our business, financial condition or results of operations.

EMPLOYEES

     As of February 29, 2000, we had 197 full-time employees, 42 of whom hold
Ph.D. degrees and 35 of whom hold other advanced degrees. Our future success
depends in significant part upon the continued service of our key scientific,
technical and senior management personnel and our continuing ability to attract
and retain highly qualified technical and managerial personnel. None of our
employees is represented by a labor union or covered by a collective bargaining
agreement. We have not experienced any work stoppages and we consider our
relations with employees to be good. In addition to full-time employees, we use
the services of contractors, part-time and temporary staff. As of February 29,
2000, we had a total of 69 contractors, part-time and temporary staff.

EXECUTIVE OFFICERS

     Our executive officers are as follows:

<TABLE>
<CAPTION>
                NAME                   AGE                           POSITION
                ----                   ---                           --------
<S>                                    <C>   <C>
Stuart J.M. Collinson................  40    President, Chief Executive Officer and Chairman
                                             of the Board
Paul J. England......................  56    Senior Vice President, Research
Thomas G. Klopack....................  48    Senior Vice President and Chief Operating Officer
John D. Mendlein.....................  40    Senior Vice President, Intellectual Property,
                                             General Counsel and Chief Knowledge Officer
John R. Pashkowsky...................  43    Vice President, Finance
Harry Stylli.........................  38    Senior Vice President, Commercial Development
</TABLE>

     Stuart J.M. Collinson joined us in May 1999 as President and a member of
the Board of Directors and was elected to the position of Chief Executive
Officer in November 1999. He was appointed as Chairman of the Board in March
2000. Prior to joining Aurora, Dr. Collinson served as a consultant to us from
December 1998 to May 1999 and as Chief Executive Officer of Andaris, Ltd., a
privately held biopharmaceutical company, from June 1998 to November 1998. Prior
to Andaris, Dr. Collinson held several positions with Glaxo Wellcome from
December 1994 through June 1998, most recently serving as Co-Chairman, Hospital
and Critical Care Therapy Management Team and Director of Hospital and Critical
Care. Dr. Collinson previously held several positions with Baxter International,
Inc. and the Boston Consulting Group. Dr. Collinson received his Ph.D. in
physical chemistry from the University of Oxford, England and his M.B.A. from
Harvard University.

     Paul J. England joined us in February 1998 and currently serves as our
Senior Vice President, Research. From 1984 to 1997, he served in various
capacities at SmithKline Beecham in the United Kingdom, most recently serving as
Vice President, Molecular Screening Technologies, with worldwide responsibility
for high throughput screening. Dr. England received his B.S., Ph.D. and D.Sc.
degrees in biochemistry from the University of Bristol. After postdoctoral work
at the University of California, he held a lectureship in biochemistry at the
University of Bristol from 1973 to 1984. We expect Dr. England to transition to
part-time employment with us in the near future.

     Thomas G. Klopack joined us in July 1998 and currently serves as our Senior
Vice President and Chief Operating Officer. He served the past 18 years as an
executive with Raychem Corporation in various capacities involving new product
commercialization, strategic planning, operations and logistics, most recently
as Director, Strategic Planning, in the Electronics Division. Prior to joining
Raychem, Mr. Klopack worked at Exxon Corporation in engineering operations. Mr.
Klopack obtained his B.S. in chemical engineering at Carnegie-Mellon University
and his M.B.A. at Harvard University.

                                       15
<PAGE>   16
     John D. Mendlein joined us in August 1996 and currently serves as our
Senior Vice President, Intellectual Property, General Counsel and Chief
Knowledge Officer. Dr. Mendlein worked with the law firm of Cooley Godward LLP
in Palo Alto from 1990 to 1996, focusing on patent prosecution and litigation,
and technology licensing for a variety of biotechnology, medical device and
diagnostic companies. He received his Ph.D. from the University of California,
Los Angeles and his J.D. from the University of California, Hastings College of
the Law.

     John R. Pashkowsky joined us in December 1997 and currently serves as our
Vice President, Finance. From December 1997 through March 2000 Mr. Pashkowsky
held various financial positions, most recently Senior Director, Finance and
Treasurer. From 1981 to 1997 he served in various positions at Senior Flexonics,
Ketema, Inc. and Ametek, Inc., most recently as Controller of the Ketema
Division of Senior Flexonics, and was employed by Rohr Industries Inc. from 1979
to 1981. Mr. Pashkowsky received his B.S. in Business Administration from the
State University of New York and his M.B.A. in Finance from San Diego State
University.

     Harry Stylli joined us in November 1995 and currently serves as our Senior
Vice President, Commercial Development. From 1989 to 1995, Dr. Stylli held
several positions at Glaxo Wellcome, where he was integrally involved in the
International Screening and Technology program. He obtained a Ph.D. in
Pharmaceutical Chemistry from Kings College, London University, an M.B.A. from
Open University, Milton Keynes, United Kingdom and a B.Sc. in Biochemical
Pharmacology, with honors, from the University of East London.

SCIENTIFIC ADVISORS

     Our scientific advisors, who have demonstrated expertise in various fields,
advise us from time to time concerning long-term scientific planning, research
and development. The scientific advisors also evaluate our research programs,
recommend personnel to us, and advise us on specific scientific and technical
issues. The scientific advisors are compensated by retainer and on a time and
expenses basis and have received shares and options to purchase shares of our
common stock. We have consulting agreements with a number of the scientific
advisors.

     We do not employ any of the scientific advisors, and they may have other
commitments to or consulting or advisory contracts with their employers or other
entities that may conflict or compete with their obligations to us. Accordingly,
such persons are expected to devote only a small portion of their time to us.
Our scientific advisors are:

     Timothy J. Rink, M.D., Sc.D. -- Former President and Chief Executive
Officer and Chairman of Aurora. Previously President and Chief Technical Officer
of Amylin Pharmaceuticals, Inc. and Vice President, Research at SmithKline
Beecham in U.K.

     Michael Geoffrey Rosenfeld, M.D. -- Investigator, Howard Hughes Medical
Institute; Professor of Medicine, University of California, San Diego

     Lubert Stryer, M.D. -- Winzer Professor in the School of Medicine and
Professor of Neurobiology, Stanford University

     Roger Y. Tsien, Ph.D. -- Investigator, Howard Hughes Medical Institute;
Professor, Department of Pharmacology, School of Medicine, University of
California, San Diego; Professor, Department of Chemistry and Biochemistry,
University of California, San Diego

     Charles S. Zuker, Ph.D. -- Investigator, Howard Hughes Medical Institute;
Professor, Departments of Biology and Neurosciences, School of Medicine,
University of California, San Diego

                                       16
<PAGE>   17

RISK FACTORS

THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR
OUR FUTURE FINANCIAL PERFORMANCE. YOU ARE CAUTIONED THAT SUCH STATEMENTS ARE
ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN
EVALUATING SUCH STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS
IDENTIFIED IN THIS FORM 10-K, INCLUDING THOSE DISCUSSED BELOW, WHICH COULD CAUSE
ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE
FORWARD-LOOKING STATEMENTS.

WE MAY NOT BE ABLE TO COMMERCIALIZE SUCCESSFULLY OUR NEW TECHNOLOGIES OR
PRODUCTS, WHICH COULD CAUSE US TO BE UNPROFITABLE OR LEAD TO LOSS OF BUSINESS.

     You should evaluate our business in light of the uncertainties and
complexities affecting a growing technology company. Our proprietary
technologies and products are new and in development. In particular, our UHTSS,
our AMCS, and our methods of assay development and screening targets incorporate
new and unproven approaches to the discovery of potential medicines. For
example:

     - our fluorescent assay technologies and instruments have only recently
       begun to be used in the drug discovery process and to our knowledge have
       never been used in the discovery of any medicine that has been
       commercialized;

     - our UHTSS and AMCS technologies have yet to, and may never, be
       implemented as fully operational systems;

     - our UHTSS and AMCS will require significant additional investment and
       development prior to commencement of full-scale commercial operation,
       including software integration with complex instrumentation and testing
       to validate performance; and

     - some of the instrumentation and software expected to comprise our UHTSS
       and AMCS have not yet been used in commercial applications.

     Many of these technologies have not been validated or developed at levels
necessary to screen small volumes, and we cannot assure you that UHTSS and AMCS
technologies will achieve expected performance levels at these scales. If we are
unable to commercialize successfully the UHTSS or AMCS or if we are unable to
commercialize successfully our screening methods, we may not be able to achieve
our business objectives or build a sustainable or profitable business.

IF WE DO NOT TIMELY AND SUCCESSFULLY COMPLETE THE DEVELOPMENT OF OUR UHTSS OR
AMCS, OUR RELATIONSHIPS WITH OUR CUSTOMERS COULD BE HARMED, WE COULD BE SUBJECT
TO CONTRACTUAL DISPUTES AND WE COULD BE REQUIRED TO PAY FINANCIAL PENALTIES TO
OUR CUSTOMERS.

     Complex instrumentation systems that appear to be promising at early stages
of development may not become fully operational for a number of reasons. These
systems may:

     - be found ineffective;

     - be impossible or uneconomical to produce;

     - fail to achieve expected performance levels or industry acceptance; or

     - be precluded from commercialization by the proprietary rights of third
       parties.

     The complexity of both the UHTSS and AMCS has led to unexpected delays in
their development that could lead to financial penalties and contractual
disputes regarding the delivery and acceptance of these instruments by our
customers. The successful implementation

                                       17
<PAGE>   18
and operation of the UHTSS and AMCS will be a complex process requiring
integration and coordination of a number of factors, including integration of
and successful interface between complex advanced robotics, microfluidics,
automated storage and retrieval systems and software and information systems. We
may not be able to successfully integrate or implement all of the
instrumentation needed for the UHTSS and AMCS. In addition, because we are also
dependent in part on the performance of our customers and suppliers in order to
deliver these platforms, our ability to timely deliver these platforms may be
outside of our control.

     Some of our agreements with our customers provide for penalties to be paid
by us if we do not meet development schedules contained in the agreements. Our
agreement with Bristol-Myers provides for penalty payments up to a maximum of
$1,000,000 if we fail to deliver the completed UHTSS by a specified time. In
addition, Bristol-Myers may be able to withdraw from further development of the
UHTSS without additional payment. Our agreement with Warner Lambert provides for
penalty payments up to a maximum of $888,300 if we fail to deliver the completed
AMCS according to a specified development schedule.

     We are currently behind schedule in the delivery and integration of Module
3, the software component of the UHTSS, under our agreement with Bristol-Myers
and the delivery of the AMCS under our agreement with Warner Lambert. We
currently expect to complete delivery and integration of Module 3 and delivery
of the AMCS in the second half of 2000. Although we are currently negotiating
with Bristol-Myers and Warner Lambert to modify the development schedules
contained in those agreements, we are currently in the penalty phase under the
Warner Lambert agreement. If we are unable to renegotiate the development
schedules in these agreements, we could be required to pay penalties or enter
into contractual disputes which could have a material adverse effect on our
business, financial condition or results of operations.

EVEN IF WE SUCCESSFULLY COMPLETE THE DEVELOPMENT OF OUR UHTSS AND AMCS, OTHER
LIMITATIONS OR DEFECTS MAY EMERGE LATER THAT COULD LIMIT THEIR UTILITY AND
REDUCE OUR FUTURE ABILITY TO GENERATE REVENUES.

     As the UHTSS and AMCS are individually developed, integrated and used, it
is possible that previously unanticipated limitations or defects may emerge. In
addition, operators using the system may require substantial new technical
skills and training. Unforeseen complications may arise in the development,
delivery and operation of the UHTSS and AMCS that could materially delay or
limit their use by us and our customers, substantially increase the anticipated
cost of development of the systems, result in our breach of contractual
obligations to our customers and others, or render the systems unable to perform
at the quality and capacity levels required for success. We may not be able to
successfully complete the development of the UHTSS and AMCS and achieve
anticipated throughputs, gain industry acceptance of our approach to the
identification of lead compounds or develop a sustainable profitable business.
Any complications or delays could subject us to contractual disputes or
litigation, limit our ability to use the UHTSS and AMCS for research and
development as currently expected, reduce our future expected revenues from
these instruments and have other material adverse effects on our business,
financial condition or results of operations.

WE DEPEND ON COMMERCIAL RELATIONSHIPS WITH OTHER COMPANIES, AND OUR FAILURE TO
SUCCESSFULLY MANAGE OUR EXISTING AND FUTURE RELATIONSHIPS COULD PREVENT US FROM
COMMERCIALIZING MANY OF OUR PRODUCTS AND SUSTAINING PROFITABILITY OR REVENUE
GROWTH.

     We have collaborative agreements with Bristol-Myers, Eli Lilly, Warner
Lambert, Merck, and Pfizer to license our fluorescence assay technologies for
their internal discovery research and to provide services on assay development.
With the exception of Eli Lilly, these companies also

                                       18
<PAGE>   19
participate in the co-development of the UHTSS for installation in their own
facilities. In addition, we have developed or are developing assays for and/or
implemented or implementing screening programs for Pharmacia & Upjohn, Inc.,
F.Hoffmann-LaRoche Ltd., American Home Products, Glaxo Wellcome, Roche
Bioscience, Becton Dickinson, Allelix Biopharmaceuticals, Inc., Cystic Fibrosis
Foundation, and Cytovia, Inc. Under these agreements, we have limited or no
control over the resources that any collaborator may devote to our products or
programs and we cannot assure you that our collaborators will continue to devote
the same resources to our collaboration in the future. Our agreements generally
may be terminated by the collaborator without cause upon short notice and in
many cases without payment to us, which would result in our loss of anticipated
revenue. In addition we cannot assure you that our collaborators will perform
their obligations as expected or that we will derive any additional revenue from
these agreements. Our present or future commercial relationships could be harmed
if:

     - we do not deliver our services or systems when contractually specified;

     - we do not achieve our research and development objectives under our
       collaborative agreements;

     - we develop products and processes or enter into additional collaborative
       agreements that could conflict with the business objectives of our
       existing collaborative partners;

     - we disagree with our collaborative partners as to rights to intellectual
       property we develop;

     - we are unable to manage multiple simultaneous collaborative
       relationships;

     - our collaborative partners become competitors of ours or enter into
       agreements with our competitors;

     - consolidation in our target markets limits the number of potential
       collaborative partners; or

     - we are unable to negotiate additional agreements having terms
       satisfactory to us.

     Termination of our existing or future collaboration agreements, or the
failure to enter into a sufficient number of additional collaborative agreements
on favorable terms, could have a material adverse effect on our business,
financial condition or results of operations.

WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.

     We earned small profits in 1997 and 1999 but had an accumulated deficit of
$21.6 million as of December 31, 1999. Our ability to sustain profitability will
depend in part on our ability to:

     - successfully complete our UHTSS and AMCS on a timely basis;

     - successfully commercialize drug discovery services to pharmaceutical and
       biotechnology companies; and

     - gain industry acceptance of our systems, services and technologies.

     We expect to spend significant amounts of money to fund the expansion of
our operations and the continued development of our products, systems and
fluorescence assay and genomics technologies. As a result, we expect that our
operating expenses will increase in the near term and, consequently, we will
need to generate additional revenue to sustain profitability. Future revenue is
uncertain because our ability to generate revenue will depend upon our ability
to enter into new collaborative, service and license agreements, and to meet
research, development and commercialization objectives under new and existing
agreements. Even if we

                                       19
<PAGE>   20
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

OUR BUSINESS MODEL IS NEW, WHICH MAY DISCOURAGE THIRD PARTIES FROM USING OUR
TECHNOLOGIES AND SERVICES.

     We intend to use our UHTSS and fluorescence assay technologies to rapidly
identify for ourselves and our collaborators as many therapeutically relevant
targets and compounds with as much commercial potential as possible.
Historically, pharmaceutical and biotechnology companies have conducted
molecular target screening and lead compound identification within their own
internal research departments because of the highly proprietary nature of these
discovery activities, due to the importance of these activities to drug
discovery and development efforts and the desire to obtain maximum patent and
other proprietary protection on the results of their programs. Pharmaceutical
and biotechnology companies may choose not to outsource their drug discovery
services needs to us. Our ability to succeed will be dependent, in part, upon
the willingness of multiple pharmaceutical and biotechnology companies to accept
our business model and to use our systems, services and technologies as a tool
in the discovery and development of compounds with commercial potential.

     Because of the potential overlap of compounds and targets provided to us by
our collaborators, conflicts may arise among collaborators as to rights to
particular products developed as a result of being identified through the use of
our technologies. Our failure to successfully manage existing and future
collaborator relationships, maintain confidentiality among such relationships or
prevent the occurrence of such conflicts could lead to disputes that result in,
among other things, a significant strain on management resources, legal claims
involving significant time and expense and loss of reputation, a loss of capital
or a loss of collaborators, any of which could have a material adverse effect on
our business, financial condition or results of operations.

WE MAY EXPEND SUBSTANTIAL FUNDS AND MANAGEMENT EFFORT TO PURSUE ADDITIONAL
COLLABORATIVE ARRANGEMENTS WITH NO ASSURANCE OF SUCCESSFULLY SELLING OUR
PRODUCTS OR SERVICES OR ENTERING INTO A COLLABORATIVE AGREEMENT.

     Our ability to enter into agreements with additional collaborators or to
expand our agreements with existing collaborators depends in part upon our
ability to convince potential collaborators that our technologies can help
accelerate drug discovery efforts. This may require substantial time and effort
on our part to educate potential collaborators and other users of our services
and technologies on the efficiencies and potential benefits presented by our
services and technologies. In addition, many of the collaborations involve the
negotiation of customized terms regarding licensing, scope of agreement and
types of services required. We cannot assure you that the expenditure of
substantial funds and management effort to pursue collaborative opportunities
will result in a collaboration yielding significant revenues to us.

OUR CURRENT AND POTENTIAL CUSTOMERS ARE PRIMARILY FROM, AND ARE SUBJECT TO RISKS
FACED BY, THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES.

     We derive a substantial portion of our revenue from fees paid by
pharmaceutical companies and larger biotechnology companies for our products and
services. We expect that pharmaceutical companies and larger biotechnology
companies will be our primary source of revenues for the foreseeable future. As
a result, we are, and we expect to be, subject to risks and uncertainties that
affect the pharmaceutical and biotechnology industries and to possible reduction
and delays in research and development expenditures by companies in these
industries. Our future revenues may also be adversely affected by mergers and
consolidation in

                                       20
<PAGE>   21
the pharmaceutical and biotechnology industries, which will reduce the number of
our potential customers.

COMPETITION IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY RESULT IN
COMPETING PRODUCTS AND TECHNOLOGIES THAT MAKE OUR PRODUCTS AND TECHNOLOGIES
OBSOLETE.

     The pharmaceutical and biotechnology industry is characterized by rapid
technological change. Competition is intense among pharmaceutical and
biotechnology industries that attempt to identify compounds for development or
support drug discovery efforts. Because we provide many types of technology, and
the UHTSS instrumentation is designed to integrate different technologies, we
compete in many areas, including instrumentation, software, assay development,
high throughput screening and genomics. We compete with instrumentation and
screening companies, the research departments of pharmaceutical and
biotechnology companies and other commercial enterprises, as well as numerous
academic and research institutions. Another technology provider may develop a
product to compete with the UHTSS or AMCS or our fluorescence assay technology.
Pharmaceutical, biotechnology and instrumentation companies that currently
compete with us may merge or enter into alliances with other companies and
become substantial multi-point competitors. Our collaborators or potential
collaborators may assemble their own ultra-high throughput screening systems by
purchasing components or contracting for services from competitors. Genomics and
combinatorial chemistry companies may also expand their business to include
compound screening or screen development. Many of these pharmaceutical and
biotechnology companies, which represent the greatest potential market for our
systems, services and technologies, have developed or are developing internal
programs and other methodologies to improve productivity, including major
investments in robotics technology to permit the automated screening of
compounds. Our technological approaches, in particular the UHTSS, AMCS and our
fluorescence assay technology, may be rendered obsolete or uneconomical by
advances in existing technological approaches or the development of different
approaches by our current or future competitors.

WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS OR OTHER
PROPRIETARY RIGHTS, WHICH WOULD BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO
LOSE SOME OF OUR INTELLECTUAL PROPERTY RIGHTS, WOULD REDUCE OUR ABILITY TO
COMPETE IN THE MARKET AND MAY CAUSE OUR STOCK PRICE TO DECLINE.

     We rely on patents to protect a large part of our intellectual property and
our competitive position. Our patents, which have been or may be issued, may not
afford meaningful protection for our technology and products. Our competitors
may develop products and technologies similar to ours that do not conflict with
our patents. In order to protect or enforce our patent rights, we may initiate
patent litigation or proceedings against third parties, such as infringement
suits or interference proceedings. Future lawsuits or proceedings could be
expensive, take significant time, and could divert management's attention from
other business concerns. They would put our patents at risk of being invalidated
or interpreted narrowly and our patent applications at risk of not issuing. We
may also provoke these third parties to assert claims against us. The patent
position of biotechnology firms generally is highly uncertain, involves complex
legal and factual questions, and has recently been the subject of much
litigation. We cannot assure you that we will prevail in any of these suits or
that the damages or other remedies awarded to us, if any, will be commercially
valuable. During the course of these suits, there may be public announcements of
the results of hearings, motions and other interim proceedings or developments
in the litigation. If securities analysts or others perceive any of these
results to be negative, it could cause our stock price to decline.

                                       21
<PAGE>   22
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.

     We may be sued for infringing on the patent rights of others. We may have
to pay substantial damages, including treble damages, for past infringement if
it is ultimately determined that our products infringe a third party's
proprietary rights. Because we produce many different technologies, there is the
potential for patent infringement suits by a wide-range of companies that
control patents for assay technologies, genomic technologies, software and
instrumentation. The drug discovery industry, including screening technology
companies, has a history of patent litigation and will likely continue to have
patent litigation suits concerning drug discovery technologies. A number of
patents have issued and may issue on certain fluorescence technologies, targets
or their use in screening assays that could prevent us and our collaborators
from developing assays using such technologies or targets, or relate to certain
other aspects of technology that we use or expect to use. From time to time we
receive invitations from third parties to license patents owned or controlled by
third parties. We evaluate these requests and attempt to obtain licenses if they
are compatible with our business objectives. We may not be able to obtain any
licenses on acceptable terms, if at all. Our inability to obtain or maintain
patent protection or necessary licenses could have a material adverse effect on
our business, financial condition or results of operations.

OTHER METHODS OF PROTECTING OUR TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY,
INCLUDING CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS, MAY NOT
ADEQUATELY PREVENT DISCLOSURE OF PROPRIETARY INFORMATION.

     In addition to patent protection, we rely on a combination of copyright and
trademark laws, trade secrets, know-how, and other contractual provisions and
technical measures to protect our intellectual property rights. In an effort to
maintain the confidentiality and ownership of trade secrets and proprietary
information, we require employees, consultants and collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with us. These measures may not provide meaningful protection for
our trade secrets or other confidential information and technology. If these
measures do not protect our rights, third parties could use our technology, and
our ability to compete in our markets would be harmed. In the event of
unauthorized use or disclosure of our confidential and proprietary information,
we may not have adequate remedies. Despite our efforts, third parties may
independently discover trade secrets and proprietary information. Costly and
time-consuming litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain and maintain trade secret
protection could adversely affect our competitive position.

IF WE ENGAGE IN ANY MERGER OR ACQUISITION TRANSACTIONS, WE WILL INCUR A VARIETY
OF COSTS AND MAY POTENTIALLY FACE OTHER RISKS THAT COULD ADVERSELY AFFECT OUR
BUSINESS OPERATIONS.

     If appropriate opportunities become available, we may consider acquiring
businesses, technologies or products that we believe are a strategic fit with
our business. We currently have no commitments or agreements with respect to any
material acquisitions. If we do pursue an acquisition strategy, we could:

     - issue equity securities which could dilute current stockholders'
       percentage ownership;

     - incur substantial debt;

     - incur substantial distraction from our current business objectives; or

     - assume contingent liabilities.

                                       22
<PAGE>   23
     We may not be able to integrate successfully any businesses, products,
technologies or personnel that we might acquire in the future without a
significant expenditure of operating, financial and management resources, if at
all. In addition, future acquisitions might negatively impact our business
relations with our collaborators. Further, recent proposed accounting changes
could result in a negative impact on our net income (loss) or results of
operations from amortization of goodwill and/or other intangible assets related
to any acquisition. Any of these adverse consequences could harm our business.

BECAUSE OUR PRODUCTS AND SERVICES CURRENTLY DEPEND ON COMPONENTS AND
TECHNOLOGIES LICENSED FROM THIRD PARTIES, A BREACH BY US OF ANY OF THE TERMS OF
THESE LICENSES, OR SHOULD ANY OF OUR LICENSORS LOSE THEIR RIGHTS UNDERLYING ANY
OF OUR LICENSES, IT COULD RESULT IN OUR LOSS OF ACCESS TO THESE COMPONENTS AND
TECHNOLOGIES AND COULD DELAY OR SUSPEND SEVERAL OF OUR RESEARCH AND DEVELOPMENT
PLANS.

     Some aspects of our technology and products have been licensed from third
parties. If we fail to maintain the right to use these components it could
seriously harm our business, financial condition and results of operation. In
particular, we are dependent, in part, on the patent rights licensed from third
parties with respect to our fluorescence assay and screening technologies.

     Patent applications filed by us or our licensors may not result in patents
being issued with respect to intellectual property we have licensed, claims of
those patents may not offer sufficient protection, and any patents licensed by
us may be challenged, narrowed, invalidated, or circumvented. We may also be
subject to legal proceedings that result in the revocation of patent rights
previously licensed to us, as a result of which we may be required to obtain
licenses from others to continue to develop, test or commercialize our systems,
services or technologies. We may not be able to obtain such licenses on
acceptable terms, if at all, which would result in delays or a suspension of
several of our research, development or commercialization plans.

OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY IN WHICH WE
OPERATE.

     The market prices for securities of comparable technology companies,
particularly life science companies, have been highly volatile and the market
has experienced significant price and volume fluctuations that are often
unrelated to the operating performance of particular companies. Factors that
could have a significant impact on the market price of our common stock include:

     - announcements of technological innovations or new commercial products by
       us or its competitors;

     - disputes or other developments concerning proprietary rights, including
       patents and litigation matters and the ability to patent genes and
       targets;

     - publicity regarding actual or potential results with respect to systems,
       services or technologies under development by us, our collaborative
       partners or our competitors;

     - regulatory developments in both the United States and foreign countries;

     - public concern as to the efficacy of new technologies;

     - general market conditions; and

     - quarterly fluctuations in our revenue and financial results.

In particular, the realization of any of the risks described in these "Risk
Factors" could have a dramatic and materially adverse impact on the market price
of our common stock. In the past,

                                       23
<PAGE>   24
following periods of volatility in the market price of a company's securities,
securities class-action litigation has often been instituted against those
companies. This type of litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which could
materially affect our business, financial condition or results of operations.

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND ANY FAILURE TO MEET FINANCIAL
EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE.

     Our quarterly operating results have fluctuated in the past and are likely
to do so in the future as a result of many factors, many of which are out of our
control. For example, our revenues have varied dramatically as a result of the
timing of fees we obtain under our various collaborative, technology licensing
and services agreements, as these payments are frequently comparatively large
and are recognized unevenly over time. It is possible that in some future
quarter or quarters, our operating results will be below the expectations of
securities analysts or investors. In this event, the market price of our common
stock may fall abruptly and significantly. Because our revenue and operating
results are difficult to predict, we believe that period-to-period comparisons
of our results of operations are not a good indication of our future
performance. Some of the factors that could cause our operating results to
fluctuate include:

     - termination of collaborative agreements;

     - our ability to enter into new agreements with collaborative partners or
       technology licensees;

     - our ability to complete delivery requirements under existing
       collaborative agreements;

     - our acquisition of complementary businesses or technologies; and

     - general and industry specific economic conditions, which may affect our
       customers' research and development expenditures.

     If revenue declines in a quarter, whether due to a delay in recognizing
expected revenue or otherwise, our earnings will decline because many of our
expenses are relatively fixed.

IF OUR CONTRACTORS AND VENDORS FAIL TO PROVIDE US WITH ESSENTIAL COMPONENTS THAT
WE NEED TO CONTINUE RESEARCH AND DEVELOPMENT, WE WOULD EXPERIENCE DELAYS AND
ADDITIONAL EXPENSES.

     We rely on a limited number of contractors, suppliers and vendors for the
development, manufacture and supply of certain components in our informatics,
robotics, automated storage and retrieval, liquid handling, microfluidics and
detection devices. Although we believe that alternative sources for these
components are available, any interruption in the development, manufacture or
supply of a single-sourced component could have a material adverse effect on our
ability to develop the UHTSS or other systems until a new source of supply is
qualified. Any delay due to an interruption of this type could subject us to
penalties for delays in delivery of the UHTSS and, as a result, could have a
material adverse effect on our business, financial condition or results of
operations. In addition, our current or future technology suppliers may not meet
our requirements for quality, quantity or timeliness. If any of our current or
future technology suppliers fails to deliver components, including mechanical
components of the UHTSS or AMCS, that meet required specifications in a timely
manner, or at all, it could significantly affect our ability to meet our
contractual obligations to our UHTSS syndicate members and expose us to
significant potential liabilities.

                                       24
<PAGE>   25
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, IT COULD HARM OUR RESEARCH AND DEVELOPMENT EFFORTS AND
WOULD IMPAIR OUR ABILITY TO COMPETE.

     Our success depends to a significant degree upon the continued
contributions of our board of directors, executive officers, management and
staff. If we lose the services of one or more of these people, we may be unable
to achieve our business objectives, meet our commitments under existing
agreements and our stock price could decline. Dr. Timothy Rink, one of our
directors, currently does not anticipate that he will stand for re-election at
our 2000 annual meeting of stockholders. We may not be able to attract or retain
qualified employees or board members in the future due to intense competition
for qualified personnel among biotechnology and other technology-based
businesses, particularly in the San Diego area. If we are unable to attract and
retain the necessary personnel to accomplish our business objectives, we may
experience resource constraints that will adversely affect our ability to meet
the demands of our collaborative partners in a timely fashion or to support our
ability to attract and retain highly skilled scientists, including individuals
holding doctoral degrees in the basic sciences and engineers. All of our
employees are at-will employees, which means that either we or an employee may
terminate an employment relationship at any time.

WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.

     Our success will depend on our ability to expand and manage our operations
and facilities. To be cost-effective and timely in the development and
installation of our systems, services and technologies, we must coordinate the
integration of multiple technologies in complex systems, both internally and for
our collaborators. We may not be able to manage our growth, to meet the staffing
requirements of additional collaborative relationships or successfully
assimilate and train new employees. If we continue to grow, our existing
management skills and systems may not be adequate and we may not be able to
manage any additional growth effectively. If we fail to achieve any of these
goals, there could be a material adverse effect on our business, financial
condition or results of operations.

WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO FUND OUR OPERATIONS,
OR WE MAY NEED TO ENTER INTO FINANCING ARRANGEMENTS WITH UNFAVORABLE TERMS WHICH
COULD ADVERSELY AFFECT YOUR OWNERSHIP INTEREST AND RIGHTS AS COMPARED TO OTHER
STOCKHOLDERS.

     We may be required to raise additional capital over a period of several
years in order to expand our operations or acquire new technology. We may raise
this additional capital through additional public or private equity financings,
borrowings and other available sources. Our business or operations may change in
a manner that would consume available resources more rapidly than anticipated,
or substantial additional funding may be required before we can sustain
profitable operations. If additional financing is required to operate our
business, we cannot assure you that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our operations, take
advantage of opportunities, develop products or technologies or otherwise
respond to competitive pressures could be significantly limited.

     If we raise additional funds through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution or such equity securities may provide for rights,
preferences or privileges senior to those of the holders of our common stock. If
we raise additional funds through the issuance of debt securities, the debt
securities would have rights, preferences and privileges senior to holders of
common stock and the terms of that debt could impose restrictions on our
operations.

                                       25
<PAGE>   26
OUR TECHNOLOGIES AND PRODUCTS MAY NOT RESULT IN THE DISCOVERY AND
COMMERCIALIZATION OF DRUG PRODUCTS AND WE MAY NOT GENERATE REVENUES FROM
MILESTONES OR ROYALTIES IN THE FUTURE.

     Many of our agreements with collaborators and technology licensees provide
that we may receive milestone payments or royalties based on future sales of
drug products discovered through the use of our services, technologies and
products. Use of our services, technologies or products may not result in the
discovery of potential drug candidates that will be safe or effective. If our
services, technologies and products assist in the development of commercialized
pharmaceutical products, milestone payments and royalties would be generated
only after:

     - lengthy and costly pre-clinical and clinical development efforts;

     - the receipt of necessary regulatory approvals, including approvals by the
       FDA and equivalent foreign authorities; and

     - the integration of manufacturing capabilities and successful marketing
       efforts, all of which must be performed by our collaborators.

     We do not currently intend to perform any of these activities. We cannot
assure you that our collaborators will decide to develop or commercialize
potential drug candidates identified through the use of our technologies.
Development and commercialization of potential drug candidates depend not only
on the achievement of research objectives by us and our collaborators, but also
on each collaborator's own financial, competitive, marketing and strategic
considerations, all of which are outside our control. If commercialization of
lead compounds is successful, disputes may arise over payments to us. We do not
expect to receive royalties or other revenues from commercial sales of products
based upon any compound identified using our technologies for at least several
years, if at all.

DRUG PRODUCTS DEVELOPED AND COMMERCIALIZED BY OUR COLLABORATIVE PARTNERS WILL
LIKELY REQUIRE REGULATORY APPROVALS, WHICH MAY REDUCE OUR POTENTIAL REVENUES
FROM MILESTONES OR ROYALTIES.

     If a collaborator successfully identifies a drug product for development
and commercialization, it will likely be subject to extensive government
regulation. Regulation by the FDA and other governmental entities in the United
States and other countries will be a significant factor in the production and
marketing of any pharmaceutical products that may be developed by a
collaborator. We do not currently plan to develop our own pharmaceutical
products. Pharmaceutical products developed by our collaborators will require
lengthy and costly pre-clinical and clinical trials and regulatory approval by
governmental agencies prior to commercialization. Approvals may not be granted
despite the substantial time and resources required to obtain approvals and
comply with appropriate statutes and regulations. Delays in obtaining regulatory
approvals would adversely affect the marketing of any drugs developed by our
collaborators, diminish any competitive advantages that our collaborators may
attain and therefore adversely affect our ability to receive royalties or
milestone payments.

FUTURE SALES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS OR BY US COULD CAUSE
OUR STOCK PRICE TO DECLINE.

     Sales by existing stockholders of a large number of shares of our common
stock in the public market or the perception that sales could occur could cause
the market price of our common stock to drop. Likewise, additional equity
financings or other share issuances by us could adversely affect the market
price of our common stock.

                                       26
<PAGE>   27
WE MAY BE SUED FOR PRODUCT LIABILITY.

     We may be held liable if any product we develop, or any product which is
made with the use of any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
Although we currently maintain product liability insurance, we may not have
sufficient insurance coverage against potential liabilities and we may not be
able to obtain sufficient coverage at a reasonable cost. Furthermore, product
liability insurance is becoming increasingly expensive. As a result, we may not
be able to maintain current amounts of insurance coverage, obtain additional
insurance, or obtain insurance at a reasonable cost, which could prevent or
inhibit the our commercialization of products or technologies. If we are sued
for any injury caused by our technology or products, our liability could exceed
our total assets.

OUR ACTIVITIES INVOLVE THE USE OF HAZARDOUS MATERIALS, WHICH SUBJECT US TO
REGULATION, RELATED COSTS AND DELAYS AND POTENTIAL LIABILITIES.

     Our business involves the controlled storage, use and disposal of hazardous
materials, including chemical, biological and radioactive materials. We are
subject to federal, state and local regulations governing the use, manufacture,
storage, handling and disposal of materials and waste products. Although we
believe that our safety procedures for handling and disposing of these hazardous
materials comply with the standards prescribed by law and regulation, we cannot
completely eliminate the risk of accidental contamination or injury from those
hazardous materials. In the event of an accident, we could be held liable for
any damages that result, and any liability could exceed the limits or fall
outside the coverage of our insurance. We may not be able to maintain insurance
on acceptable terms, or at all. We could incur significant costs or impairment
of our research, development or production efforts in order to comply with
current or future environmental laws and regulations.

WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.

     Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. These provisions could discourage
potential take-over attempts and could adversely affect the market price for our
common stock. Because of these provisions, you may not be able to receive a
premium on your investment.


                                       27
<PAGE>   28

ITEM 2. PROPERTIES

We lease approximately 81,200 square feet of space used for laboratory and
administrative purposes in San Diego, California. These facilities are leased
through September 15, 2008. We believe these facilities are adequate for our
current and near-term projected needs and that additional space at a nearby
location will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

In March 1999, we filed an action against Anticancer, Inc. in the U.S. District
Court for the Southern District of California (99 CV 0387 E (POR)). Our
complaint alleged that Anticancer infringed our U.S. Patent Nos. 5,625,048 and
5,777,079 by employing our GFP patented technology in AntiCancer's business,
including AntiCancer's MetaMouse-Registered Trademark technology. The suit was
settled in September 1999. Under the terms of the settlement agreement, we
granted AntiCancER, Inc. certain rights to use our GFP technology, specifically,
our Aequorea victoria mutant GFP's, for use in AntiCancer's MetaMouse-Registered
Trademark technology, includINg providing services to third parties. The
agreement provides for us to receive upfront and annual payments, as well as
specified royalty payments, from AntiCancer.

We are not a party to any pending legal proceedings.

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

Not Applicable.


                                       28
<PAGE>   29

                                     PART II

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

(a)     Our common stock began trading on the Nasdaq National Market under the
        symbol "ABSC" on June 19, 1997. The following table presents high and
        low sales prices of our common stock, as reported by Nasdaq, for the
        periods indicated:



<TABLE>
<CAPTION>
1997                                                                            HIGH              LOW
----                                                                            ----              ---
<S>                                                                        <C>              <C>
Second Quarter (beginning June 19, 1997)                                   $    12.25       $    10.00
Third Quarter                                                                   15.63             9.38
Fourth Quarter                                                                  15.75            11.00

1998

First Quarter                                                                   14.38            10.25
Second Quarter                                                                  12.38             5.88
Third Quarter                                                                    9.25             3.75
Fourth Quarter                                                                   8.00             4.00

1999

First Quarter                                                                    9.63             6.00
Second Quarter                                                                   7.97             4.88
Third Quarter                                                                   17.38             6.63
Fourth Quarter                                                                  30.06             9.88
</TABLE>


        As of February 25, 2000, there were approximately 172 stockholders of
        record of our common stock. We have never declared or paid any cash
        dividends on our common stock and do not intend to pay any cash
        dividends on our common stock in the foreseeable future.

        RECENT SALES OF UNREGISTERED SECURITIES

        On February 10, 2000, we sold 1,800,000 shares of our common stock to
        selected institutional and other accredited investors at a price of $42
        per share with net proceeds of approximately $71 million after deducting
        fees and expenses. B.T. Alex Brown acted as the placement agent in
        connection with this transaction. We issued these shares in reliance
        upon the exemption from securities regulation afforded by Rule 506 of
        Regulation D under the Securities Act.



                                       29
<PAGE>   30

ITEM 6. SELECTED FINANCIAL DATA

The data set forth below should be read in conjunction with the financial
statements and accompanying notes included elsewhere in this document.







<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                          ------------------------------------------------------------
                                                                                            PERIOD FROM
                                                                                            MAY 8, 1995
                                                                                          (INCEPTION) TO
                                                                                           DECEMBER 31,
                                            1999         1998         1997         1996         1995
                                          --------     --------     --------     --------     --------
                                                     (in thousands, except per share amounts)
<S>                                       <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenue                                   $ 50,324     $ 26,538     $ 14,908     $  2,217     $       --

Operating expenses:
   Cost of revenue                          27,779       23,777        6,983           --             --
   Research and development                 11,593       17,146        5,406        4,396            366
   Selling, general and administrative      11,535        6,068        3,679        1,275             46
                                          --------     --------     --------     --------     ----------
      Total operating expenses              50,907       46,991       16,068        5,671            412
                                          --------     --------     --------     --------     ----------
Loss from operations                          (583)     (20,453)      (1,160)      (3,454)          (412)
Interest income                              1,543        2,445        1,793          580             --
Interest expense                              (691)        (645)        (346)         (59)            --
                                          --------     --------     --------     --------     ----------
Income (loss) before income taxes              269      (18,653)         287       (2,933)          (412)
Income taxes                                  (117)          --          (20)          --             --
                                          --------     --------     --------     --------     ----------
Net income (loss)                         $    152     $(18,653)    $    267     $ (2,933)    $     (412)
                                          ========     ========     ========     ========     ==========

Basic income (loss) per share             $   0.01     $  (1.14)    $   0.03     $  (3.86)    $(5,146.59)
                                          ========     ========     ========     ========     ==========
Diluted income (loss) per share           $   0.01     $  (1.14)    $   0.02     $  (3.86)    $(5,146.59)
                                          ========     ========     ========     ========     ==========

Shares used in computing:

    Basic income (loss) per share           16,967       16,312        8,970          760            < 1
                                          ========     ========     ========     ========     ==========
    Diluted income (loss) per share         18,241       16,312       15,423          760            < 1
                                          ========     ========     ========     ========     ==========
</TABLE>



<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                           ------------------------------------------------------------
                                             1999         1998         1997         1996         1995
                                           --------     --------     --------     --------     --------
                                                                  (in thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments     $ 36,618     $ 28,026     $ 48,906     $ 13,167     $     11
Total assets                                 63,862       50,955       63,036       17,515          115
Capital lease obligations, less current
    portion                                   4,343        4,788        3,422        1,111           --
Accumulated deficit                         (21,579)     (21,731)      (3,078)      (3,345)        (412)
Total stockholders' equity                   40,314       37,542       54,364       15,184         (412)
</TABLE>



                                       30
<PAGE>   31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF A NUMBER OF FACTORS INCLUDING THE ABILITY TO ATTRACT ADDITIONAL COLLABORATIVE
PARTNERS, DEVELOPMENT OR AVAILABILITY OF COMPETING SYSTEMS, AND THE ABILITY TO
MEET EXISTING COLLABORATIVE COMMITMENTS. YOU ARE ENCOURAGED TO REVIEW THE RISK
FACTORS DISCUSSED IN "BUSINESS - RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K
FOR A MORE COMPLETE DISCUSSION OF THOSE RISKS AND UNCERTAINTIES.

OVERVIEW

     We design, develop and commercialize advanced drug discovery technologies,
services and instrumentation to accelerate the discovery of new medicines, the
principal components of which are our genomics, assay and automated system
technologies. Our technology platform provides an advanced way to identify
commercially useful targets, enable rapid assay development and rapidly test
compounds for use as potential new medicines that act upon those targets. Thus,
our technology is designed to address the most significant new bottlenecks in
the drug discovery process. We are launching a proprietary large-scale biology
program to identify proteins involved in disease, or targets, rapidly
incorporate these targets into tests, or assays, that measure activity in
targets and then rapidly screen hundreds of thousands of compounds against these
assays to identify potential drugs. Our ultra-high throughput screening system,
known as the UHTSS, is designed to screen over one hundred thousand compounds
per day against targets. We believe many of our technologies have been
commercially validated by over fifteen major pharmaceutical and biotechnology
companies in the form of commercialization agreements.

     We had an accumulated deficit of $21.6 million as of December 31, 1999. Our
objective for 2000 is to continue increasing revenue, with modest expense
increases, and to maintain profitability for the full year. Our ability to
maintain profitability will depend in part on our ability to timely and
successfully complete development, manufacture and delivery of the UHTSS and
AMCS that meet contractual specifications and continue to provide drug discovery
services to pharmaceutical and biotechnology customers.

                                       31
<PAGE>   32
     We generate revenue primarily through sales of services, instruments and
intellectual property licenses to corporate collaborators. Sales to date have
been generated from a limited number of collaborators in the biotechnology and
pharmaceutical industries in the U.S. and Europe. We are subject to monetary
penalties if we do not deliver technologies on a timely basis. We have
experienced delays and we are currently in the penalty phase under our agreement
with Warner Lambert.

     Many of our agreements provide for future milestone payments from drug
development achievements and royalties from the sale of products derived from
certain of our technologies. However, collaborators may not ever generate
products from technology provided by us and thus we may not ever receive
milestone payments or royalties from marketed drugs. We believe our ability to
maintain profitability is not dependent on receipt of milestone payments or
royalties.

     We may encounter significant fluctuations in our quarterly financial
performance depending on factors such as revenue from existing and future
contracts and collaborations, timing of the delivery of technologies and systems
and the completion of contracted service commitments to our collaborators. We
will also continue to invest in new technologies to expand our core drug
discovery capabilities. Accordingly, our results of operations for any period
may not be comparable to, or predictive of, the results of operations for any
other period.

RESULTS OF OPERATIONS

  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

     Revenue. Revenue increased 90% to $50.3 million in 1999 from $26.5 million
in 1998, which was an increase of 78% from $14.9 million in 1997. The increase
in 1999 resulted primarily from new agreements executed during the year,
including a services, systems and technology access collaborative agreement with
Pfizer drug discovery services agreements with Pharmacia & Upjohn and
F.Hoffman-LaRoche, and licensing agreements with Clontech Laboratories, Inc. and
ZymoGenetics, Inc. Increased revenue under a collaborative agreement with
Bristol-Myers executed in 1996 also contributed to the overall increase in
revenue in 1999. The increase in 1998 resulted primarily from increased revenues
under our collaborative agreements with Warner Lambert and Merck, both of which
were executed in 1997, and an agreement with Warner Lambert which was executed
in 1998, to develop an AMCS.

     Expenses. Total operating expenses increased 8% to $50.9 million in 1999
from $47.0 million in 1998, which was an increase of 192% from $16.1 million in
1997. The increases in operating expenses resulted primarily from our growth,
our product development efforts, drug discovery services offerings and research
and development programs. This growth was reflected by the increase to 187
employees at December 31, 1999 from 150 employees at December 31, 1998 and 88 at
December 31, 1997, and by the expansion of facilities in October 1997 to 81,000
square feet from 22,000 square feet.

     Cost of revenue increased 17% to $27.8 million in 1999 from $23.8 million
in 1998, which was an increase of 241% from $7.0 million in 1997. In addition to
the growth of operations as noted above, the increases in cost of revenue were
primarily a result of increased purchases of materials and increased technology
development expenses related to the development of the UHTSS, the AMCS and
screening subsystems for our collaborators. Also contributing to the increase in
1999 were costs related to the completion of contracted service commitments
under new drug discovery services agreements.

     Research and development decreased 32% to $11.6 million in 1999 from $17.1
million in 1998, which was a 217% increase from $5.4 million in 1997. The
decrease in 1999 reflects a shift in drug discovery services resources from
internal research and development to external customer-funded activities to
support new as well as ongoing drug discovery services

                                       32
<PAGE>   33
agreements in 1999. In addition, non-recurring items in 1998 such as licensing
of technology from OSI Pharmaceuticals, Inc. and Xenometrix, Inc. and the costs
of initiating a collaboration with SIDDCO, Inc. to produce a large library of
compounds for our UHTSS contributed to the decrease in 1999 and the increase in
1998. The increase in 1998 was also attributable to ongoing development of a
UHTSS and an AMCS for us, and the expansion of our human cell genomics
GenomeScreen program.

     Selling, general and administrative expenses increased 90% to $11.5 million
in 1999 from $6.1 million in 1998, which was a 65% increase from $3.7 million in
1997. The increases were primarily attributable to the growth of operations as
noted above, including increases in staffing of the executive, legal and
commercial development functions.

     Interest and Other Income. Net interest income decreased 53% to $0.9
million in 1999 from $1.8 million in 1998, which was a 24% increase from $1.4
million in 1997. The decrease in 1999 primarily reflected interest income from
lower average cash and investment balances during the year. The increase in 1998
resulted from interest income from higher average cash and investment balances
due to receipts under collaborative agreements and proceeds from our initial
public offering in June 1997. Interest income was partially offset by interest
expense incurred on capital lease and loan obligations.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1999, we held cash, cash equivalents and investment
securities available-for-sale of $36.6 million and working capital of $25.8
million. We have funded operations through December 31, 1999 primarily through
receipts from corporate collaborations of $99 million, issuance of equity
securities with aggregate net proceeds of $59 million, capital equipment lease
financing of $12 million and interest income of $6 million.

     In February 2000, we completed a private placement of 1.8 million shares of
newly issued common stock to selected institutional and other accredited
investors. The purchase price was $42.00 per share, resulting in net proceeds of
approximately $71 million.

     Our facility lease agreement is secured by a letter of credit, which is
secured by a certificate of deposit recorded as restricted cash. At December 31,
1999, restricted cash totaled $0.7 million. The letter of credit will be reduced
over the next two years on a predetermined schedule.

     We have entered into certain contractual commitments, subject to
satisfactory performance by third parties, which obligate expenditures totaling
approximately $5.7 million over the next four years.

     Our strategy for the development of the UHTSS includes the establishment of
a syndicate of collaborators to provide us with funding for development,
technology and personnel resources and payments for system validation. The UHTSS
co-development syndicate currently includes Bristol-Myers, Warner Lambert, Merck
and Pfizer. We can add two more parties. We have also entered into agreements
with Warner Lambert and Pfizer to develop AMCS systems. In addition, we have
entered into collaborations with Cytovia, Inc., Pharmacia & Upjohn,
F.Hoffman-LaRoche and Cystic Fibrosis Foundation to provide screen development
and/or screening services, and with Warner Lambert, Merck, Becton Dickinson and
the National Cancer Institute for genomics programs. We have entered into
agreements for ion channel technology with Bristol-Myers, Warner Lambert, Eli
Lilly, Pfizer, Glaxo Wellcome, Roche Bioscience, American Home Products and
Merck. Other collaborations include a combinatorial chemistry agreement with
SIDDCO to synthesize large libraries of chemical compounds for us.

                                       33
<PAGE>   34
     Our ability to achieve sustained profitability will be dependent upon our
ability to sell new products and services, and to increase market share of
existing discovery services and technologies by agreements with new
collaborators and expansion of agreements with existing collaborators. Our
revenue goals may not be met. Although we are actively seeking to enter into
additional collaborations, we may not be able to negotiate additional
collaborative agreements on acceptable terms, if at all. Some of our current
collaborative agreements may be terminated by the collaborator without cause
upon short notice, which would result in loss of anticipated revenue. Although
certain of our collaborators would be required to pay some penalties in the
event they terminate their agreements without cause, any of our collaborators
may elect to terminate their agreements with us. In addition, collaborators may
terminate their agreements for cause if we cannot deliver the technology in
accordance with the agreements. Our collaborators may not perform their
obligations as expected and we may not derive any additional revenue from the
agreements. Current or future collaborative agreements may not be successful and
provide us with expected benefits. Termination of our existing or future
collaborative agreements, or the failure to enter into a sufficient number of
additional collaborative agreements on favorable terms or generate sufficient
revenues from our services and technologies could have a material adverse effect
on our business, financial condition or results of operations.

     The complexity of both the UHTSS and AMCS has led to unexpected delays in
their development that have led, and may in the future lead, to financial
penalties and contractual disputes regarding the delivery and acceptance of
these instruments by our customers. The successful implementation and operation
of the UHTSS and AMCS will be a complex process requiring integration and
coordination of a number of factors, including integration of and successful
interface between complex advanced robotics, microfluidics, automated storage
and retrieval systems and software and information systems. We may not be able
to successfully integrate or implement all of the instrumentation needed for the
UHTSS and AMCS. In addition, because we are also dependent in part on the
performance of our customers and suppliers in order to deliver these platforms,
our ability to timely deliver these platforms may be outside of our control.

     Some of our agreements with our customers provide for penalties to be paid
by us if we do not meet development schedules contained in the agreements. Our
agreement with Bristol-Myers provides for penalty payments up to a maximum of
$1,000,000 if we fail to deliver the completed UHTSS by a specified time. Our
agreement with Warner Lambert provides for penalty payments up to a maximum of
$888,300 if we fail to deliver the completed AMCS according to a specified
development schedule.

     We are currently behind schedule in the delivery and integration of Module
3, the software component of the UHTSS, under our agreement with Bristol-Myers
and the delivery of the AMCS under our agreement with Warner Lambert. We
currently expect to complete delivery and integration of Module 3 and delivery
of the AMCS in the second half of 2000. Although we are currently negotiating
with Bristol-Myers and Warner Lambert to modify the development schedule
contained in those agreements, we are currently subject to penalty payments. If
we are unable to renegotiate the development schedules in those agreements, we
could be required to pay substantial penalties.

     We may be required to raise additional capital over the next several years
in order to conduct or expand our operations or acquire new technology. This
capital may be raised through additional public or private equity financings,
borrowings and other available sources. Our business or operations may change in
a manner that would consume available resources more rapidly than anticipated
and substantial additional funding may be required before we can sustain
profitable operations. We may not

                                       34
<PAGE>   35
continue to generate sales from and receive payments under existing
collaborative agreements and existing or potential revenue may not be adequate
to fund our operations. If additional funding becomes necessary, it may not be
available on favorable terms, if at all. If adequate funds are not available, we
may be required to curtail operations significantly or to obtain funds by
entering into arrangements with others that may have a material adverse effect
on our business, financial condition or results of operations.

IMPACT OF YEAR 2000

     The nature and progress of our plans to ensure our operations would not be
adversely impacted by the inability of computer systems to process data having
dates on or after January 1, 2000 have been discussed in prior years. In late
1999, we completed our modifications and conversions of existing software and
certain hardware. As a result of those planning and implementation efforts, we
experienced no significant disruptions in our computer systems and believe those
systems successfully responded to the Year 2000 date change. We expensed less
than $50,000 during 1999 in connection with the Year 2000 issue. We are not
aware of any material problems resulting from the Year 2000 issue, either with
our products, our internal systems, or the products and services of third
parties. We will continue to monitor our computer systems and those of our
suppliers to ensure that any latent Year 2000 matters that may arise are
addressed promptly.


                                       35
<PAGE>   36

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We invest our excess cash in interest-bearing investment-grade securities that
we hold for the duration of the term of the respective instrument. We do not
utilize derivative financial instruments, derivative commodity instruments or
other market risk sensitive instruments, positions or transactions in any
material fashion. Accordingly, we believe that, while the investment-grade
securities we hold are subject to changes in the financial standing of the
issuer of such securities, we are 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. A hypothetical 1% adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
financial instruments that are exposed to changes in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplemental data required by this item are set
forth at the pages indicated in Item 14(a)(1).

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

Not Applicable.



                                       36
<PAGE>   37

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to directors is incorporated
by reference from the information under the caption "Election of Directors"
contained in our proxy statement to be filed in connection with the solicitation
of proxies for our 2000 Annual Meeting of Stockholders (the "Proxy Statement").
The required information concerning our executive officers is contained in Item
1 of Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" in the Proxy
Statement.



                                       37
<PAGE>   38



                                     PART IV

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

(a)     (1)     Financial Statements

                The financial statements required by this item are submitted in
                a separate section beginning on page F-1 of this report.

        (2)     Financial Statement Schedules

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

        (3)     Exhibits

                See Item 14 (c) below. Each management contract or compensatory
                plan or arrangement is identified separately in Item 14 (c).

(b)     Reports on Form 8-K

        No reports on Form 8-K were filed during the quarter ended December 31,
        1999.

(c)     Exhibits



<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER        DESCRIPTION OF DOCUMENT
      ------        -----------------------
<S>                 <C>
      3.4(1)        Restated Certificate of Incorporation.
      3.5(1)        Restated Bylaws.
      4.1           Reference is made to Exhibits 3.4 and 3.5.
      4.2(1)        Form of Common Stock Certificate.
      4.3(1)        Amended and Restated Investors' Rights Agreement dated as of
                    December 27, 1996 between the Registrant and the individuals
                    and entities listed in the signature pages thereto.
     10.1(1)        Form of Indemnity Agreement entered into between Registrant
                    and its directors and officers.
     10.2(1)#       Registrant's 1996 Stock Plan, as amended and restated (the
                    "1996 Stock Plan").
     10.3(1)#       Form of Incentive Stock Option Agreement under the 1996
                    Stock Plan.
     10.4(1)#       Form of Nonstatutory Stock Option Agreement under the 1996
                    Stock Plan.
     10.5(1)#       Form of Restricted Stock Purchase Agreement under the 1996
                    Stock Plan.
     10.6(1)#       Registrant's Employee Stock Purchase Plan and related
                    offering document.
     10.7(1)#       Registrant's Non-Employee Directors' Stock Option Plan.
     10.8(1)#       Form of Nonstatutory Stock Option under Registrant's
                    Non-Employee Directors' Stock Option Plan.
     10.9(1)#       Employment Agreement dated January 23, 1996 between the
                    Registrant and Timothy J. Rink, as subsequently amended on
                    March 8, 1996.
     10.10(1)#      Employment Agreement dated August 6, 1996 between the
                    Registrant and J. Gordon Foulkes.
     10.11(1)       Preferred Stock Purchase Agreement dated as of March 8, 1996
                    between the Registrant and the individuals and entities
                    listed in the signature pages thereto.
     10.12(1)       Series D Preferred Stock Purchase Agreement dated as of
                    December 27, 1996 between the Registrant and the individual
                    and entities listed in the signature pages thereto.
     10.13(1)       Sublease dated May 29, 1996 between the Registrant and
                    Torrey Pines Science Center Limited Partnership, as
                    subsequently amended on August 31, 1996.
     10.14(1)       Master Lease Agreement dated May 17, 1996 between the
                    Registrant and Lease Management Services Incorporated.
     10.15(1)       Equipment Financing Agreement dated May 17, 1996 between the
                    Registrant and Lease Management Services Incorporated.
     10.16(1)       Security Deposit Pledge Agreement dated May 17, 1996 between
                    the Registrant and Lease Management Services Incorporated.
     10.17(1)*      Exclusive License Agreement for Fluorescent Assay
                    Technologies dated June 17, 1996
</TABLE>

                                       38
<PAGE>   39

<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER        DESCRIPTION OF DOCUMENT
      ------        -----------------------
<S>                 <C>
                    between the Registrant and The Regents of the University
                    of California.
     10.18(1)*      License Agreement dated August 2, 1996 between the
                    Registrant and California Institute of Technology.
     10.19(1)*      License Agreement dated October 4, 1996 between the
                    Registrant and the State of Oregon, acting by and through
                    the State Board of Higher Education on behalf of the
                    University of Oregon.
     10.20(1)*      Research Agreement dated April 2, 1996 between the
                    Registrant and Sequana Therapeutics, Inc.
     10.21(1)*      Collaboration and License Agreement effective as of April
                    24, 1996 between the Registrant and Packard Instrument
                    Company, Inc.
     10.22(1)*      Collaborative Research and License Agreement dated November
                    26, 1996 between the Registrant and Bristol-Myers Squibb
                    Pharmaceutical Research Institute.
     10.23(1)*      Collaborative Research and License Agreement dated December
                    18, 1996 between the Registrant and Eli Lilly and Company.
     10.24(1)*      Collaboration Agreement effective as of February 1, 1997
                    between the Registrant and Allelix Biopharmaceuticals Inc.
     10.25(1)       Multi-Tenant Industrial Lease dated April 7, 1997 between
                    the Registrant and AEW/LBA Acquisition Co. II, LLC., as
                    subsequently amended on June 12, 1997.
     10.26(2)       First Amendment dated September 1, 1997, to Multi-Tenant
                    Industrial Lease between the Registrant and AEW/LBA
                    Acquisition Co. II, LLC.
     10.27(2)*      Collaborative Research and License Agreement dated September
                    22, 1997 between the Registrant and Warner-Lambert Company.
     10.28(3)*      Collaborative Research and License Agreement dated December
                    18, 1997 between the Registrant and Merck & Co., Inc.
     10.29(3)       Negative Covenant Pledge Agreement dated September 29, 1997
                    between the Registrant and Lease Management Services
                    Incorporated.
     10.30(3)       Collateral Security Agreement dated December 16, 1997
                    between the Registrant and Lease Management Services
                    Incorporated.
     10.31(3)*      Packard Aurora Supply Agreement dated February 5, 1998
                    between the Registrant and Packard Instrument Company, Inc.
     10.32(3)*      Amendment to Collaboration and License Agreement dated
                    February 7, 1998, to Collaboration and License Agreement
                    effective as of April 24, 1996 between the Registrant and
                    Packard Instrument Company, Inc.
     10.33(3)#      Amendment dated January 2, 1998, to Employment Agreement
                    between the Registrant and J. Gordon Foulkes.
     10.34(4)*      Combinatorial Chemistry Agreement dated April 25, 1998
                    between the Registrant and SIDDCO, Inc.
     10.35(4)*      Agreement dated June 11, 1998 between the Registrant and J.
                    Gordon Foulkes.
     10.36(4)       Agreement dated July 16, 1998 between the Registrant and
                    Deborah J. Tower.
     10.37(5)*      Collaborative Research Agreement dated July 16, 1998 between
                    the Registrant and Cytovia, Inc.
     10.38(5)*      AMCS Development Agreement dated August 21, 1998 between the
                    Registrant and Warner-Lambert Company.
     10.39(6)#      Promissory Note dated February 18, 1997 between the
                    Registrant and Harry Stylli.
     10.40(6)#      Terms of employment dated December 3, 1997 between the
                    Registrant and Paul J. England.
     10.41(6)#      Terms of employment dated June 9, 1998 between the
                    Registrant and Thomas G. Klopack.
     10.42(6)*      Termination Agreement between the Registrant and Packard
                    Instrument Company, Inc.
     10.43(6)#      Loan Agreement and Promissory Note dated December 23, 1998
                    between the Registrant and Thomas G. Klopack.
     10.44(7)*      Collaborative Research and License Agreement effective as of
                    February 5, 1999 between the Registrant and The Pharmacia &
                    Upjohn Company.
     10.45(7)*      Collaborative Research and License Agreement effective as of
                    February 16, 1999 between the Registrant, F.Hoffmann-LaRoche
                    Ltd. and Hoffmann-LaRoche, Inc.
     10.46(7)       Loan and Security Agreement dated February 26, 1999 between
                    the Registrant and General Electric Capital Business Asset
                    Funding Corporation.
     10.47(7)*      License Agreement effective as of March 10, 1999 between the
                    Registrant and Clontech Laboratories, Inc.
</TABLE>

                                       39
<PAGE>   40

<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER        DESCRIPTION OF DOCUMENT
      ------        -----------------------
<S>                 <C>
     10.48(8)*      Collaborative Research and License Agreement effective as of
                    June 15, 1999 between the Registrant and Pfizer
                    Incorporated.
     10.49(9)*      Collaborative Research and License Agreement (Second
                    Amendment) effective as of July 29, 1999 between the
                    Registrant and Bristol-Myers Squibb Pharmaceuticals Research
                    Institute.
     10.50(9)#      Agreement dated November 2, 1999 between the Registrant and
                    Timothy J. Rink, M.D., Sc.D.
     10.51#         Agreement dated December 7, 1999 between the Registrant and
                    Stuart J.M. Collinson, Ph.D.
     10.52**        Third Amendment to Collaborative Research and License
                    Agreement effective as of November 22, 1999 between the
                    Registrant and Eli Lilly and Company.
     10.53**        Instrument, Assay Development and License Agreement
                    effective as of December 15, 1999 between the Registrant and
                    Glaxo Research and Development Ltd. and Glaxo Group Ltd.
     10.54**        Instrument, Assay Development and License Agreement
                    effective as of December 16, 1999 between the Registrant and
                    Wyeth-Ayerst.
     10.55**        License Agreement effective as of December 17, 1999 between
                    the Registrant and ZymoGenetics, Inc.
     10.56#         Agreement effective as of January 1, 2000 between the
                    Registrant and Timothy J. Rink, M.D., Sc.D.
     23.1           Consent of Ernst & Young LLP, Independent Auditors.
     24.1           Power of Attorney. Reference is made to page 41.
     27.1           Financial Data Schedule related to the Financial Statements
                    for the fiscal year ended December 31, 1999.
</TABLE>

--------------

          (1)       Previously filed as exhibits of the same number with the
                    Registrant's Registration Statement on Form S-1 (No.
                    333-23407) or amendments thereof, and incorporated herein by
                    reference.
          (2)       Previously filed as exhibits of the same number with the
                    Registrant's Quarterly Report on Form 10-Q for the quarter
                    ended September 30, 1997 (No. 0-22669) and incorporated
                    herein by reference.
          (3)       Previously filed as exhibits of the same number with the
                    Registrant's Annual Report on Form 10-K for the fiscal year
                    ended December 31, 1997 (No. 0-22669) and incorporated
                    herein by reference.
          (4)       Previously filed as exhibits of the same number with the
                    Registrant's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1998 (No. 0-22669) and incorporated herein by
                    reference.
          (5)       Previously filed as exhibits of the same number with the
                    Registrant's Quarterly Report on Form 10-Q for the quarter
                    ended September 30, 1998 (No. 0-22669) and incorporated
                    herein by reference.
          (6)       Previously filed as exhibits of the same number with the
                    Registrant's Annual Report on Form 10-K for the fiscal year
                    ended December 31, 1998 (No. 0-22669) and incorporated
                    herein by reference.
          (7)       Previously filed as exhibits of the same number with the
                    Registrant's Quarterly Report on Form 10-Q for the quarter
                    ended March 31, 1999 (No. 0-22669) and incorporated herein
                    by reference.
          (8)       Previously filed as exhibits of the same number with the
                    Registrant's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1999 (No. 0-22669) and incorporated herein by
                    reference.
          (9)       Previously filed as exhibits of the same number with the
                    Registrant's Quarterly Report on Form 10-Q for the quarter
                    ended September 30, 1999 (No. 0-22669) and incorporated
                    herein by reference.
          *         The Company has been granted confidential treatment with
                    respect to certain portions of this exhibit. Omitted
                    portions have been filed separately with the Securities and
                    Exchange Commission.
          **        The Company has requested confidential treatment with
                    respect to certain portions of this exhibit. Omitted
                    portions have been filed separately with the Securities and
                    Exchange Commission.
          #         Indicates management contract or compensatory plan or
                    arrangement.

(d)      Financial Statement Schedules

         See Item 14 (a) (2).



                                       40
<PAGE>   41

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 22, 2000.

                             By: /s/ STUART J.M. COLLINSON
                                ------------------------------------------
                                Stuart J.M. Collinson
                                President and Chief Executive Officer

                               POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, Stuart J.M. Collinson, his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this 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 attorney-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
              SIGNATURE                                     TITLE                         DATE
<S>                                            <C>                                    <C>
      /s/ STUART J.M. COLLINSON                   President, Chief Executive          March 22, 2000
----------------------------------------       Officer and Chairman of the Board
    Stuart J.M. Collinson, Ph.D.                 (PRINCIPAL EXECUTIVE OFFICER)


        /s/ JOHN R. PASHKOWSKY                    Vice President, Finance             March 22, 2000
----------------------------------------          (PRINCIPAL FINANCIAL AND
         John R. Pashkowsky                          ACCOUNTING OFFICER)


         /s/ TIMOTHY J. RINK                               Director                   March 22, 2000
----------------------------------------
 Timothy J. Rink, M.A., M.D., Sc.D


          /s/ JAMES C. BLAIR                               Director                   March 22, 2000
----------------------------------------
       James C. Blair, Ph.D.


      /s/ HUGH Y. RIENHOFF, JR.                            Director                   March 22, 2000
----------------------------------------
    Hugh Y. Rienhoff, Jr., M.D.


         /s/ ROY A. WHITFIELD                              Director                   March 22, 2000
----------------------------------------
          Roy A. Whitfield


                                                           Director                   March 22, 2000
----------------------------------------
        Timothy J. Wollaeger
</TABLE>



                                       41
<PAGE>   42

                         AURORA BIOSCIENCES CORPORATION
                          INDEX TO FINANCIAL STATEMENTS

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

Balance Sheets as of December 31, 1999 and 1998.................................................        F-3

Statements of Operations for the years ended December 31, 1999, 1998 and 1997...................        F-4

Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.........        F-5

Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997...................        F-6

Notes to Financial Statements...................................................................        F-7
</TABLE>



                                       F-1
<PAGE>   43

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Aurora Biosciences Corporation

We have audited the accompanying balance sheets of Aurora Biosciences
Corporation as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 financial position of Aurora Biosciences Corporation
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

                                            ERNST & YOUNG LLP

San Diego, California
February 10, 2000



                                       F-2
<PAGE>   44

                         AURORA BIOSCIENCES CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                              --------------------------------
                                                                                 1999               1998
                                                                              ------------        ------------
<S>                                                                           <C>                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                  $ 15,934,352        $  9,477,916
   Investment securities, available-for-sale                                    20,683,696          18,547,991
   Accounts receivable                                                           5,282,485           3,750,291
  Notes receivable from officers and employees                                      50,000             210,000
   Prepaid expenses                                                              1,443,840             475,927
   Other current assets                                                          1,623,301           1,104,249
                                                                              ------------        ------------
      Total current assets                                                      45,017,674          33,566,374
Equipment, furniture and leaseholds, net                                        11,892,398          10,863,357
Notes receivable from officers and employees                                       115,000             210,000
Restricted cash                                                                    669,810           1,096,034
Other assets                                                                     6,167,578           5,218,951
                                                                              ------------        ------------
     Total assets                                                             $ 63,862,460        $ 50,954,716
                                                                              ============        ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                           $  3,832,428        $  3,216,696
   Accrued compensation                                                          2,219,172             550,770
   Other current liabilities                                                       442,200             391,694
   Unearned revenue                                                             10,214,848           2,440,833
   Capital lease and loan obligations, current portion                           2,497,046           2,024,786
                                                                              ------------        ------------
      Total current liabilities                                                 19,205,694           8,624,779
Capital lease and loan obligations, less current portion                         4,342,726           4,787,667

Commitments

Stockholders' equity:
   Preferred stock, $.001 par value; 7,500,000 shares authorized and no
    shares issued and outstanding                                                       --                  --
   Common stock, $.001 par value; 50,000,000 shares authorized,
    17,442,741 and 17,024,919 shares issued and outstanding at December
    31, 1999 and 1998, respectively                                                 17,443              17,025
   Additional paid-in capital                                                   62,754,348          61,496,842
   Accumulated other comprehensive loss                                            (48,567)                 --
   Deferred compensation                                                          (830,112)         (2,240,606)
   Accumulated deficit                                                         (21,579,072)        (21,730,991)
                                                                              ------------        ------------
     Total stockholders' equity                                                 40,314,040          37,542,270
                                                                              ============        ============
     Total liabilities and stockholders' equity                               $ 63,862,460        $ 50,954,716
                                                                              ============        ============
</TABLE>



                             SEE ACCOMPANYING NOTES.



                                       F-3

<PAGE>   45

                         AURORA BIOSCIENCES CORPORATION

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                  1999                1998                1997
                                              ------------        ------------        ------------
<S>                                           <C>                 <C>                 <C>
 Revenue                                      $ 50,324,301        $ 26,537,888        $ 14,907,749

 Operating expenses:
    Cost of revenue                             27,778,868          23,777,215           6,982,875
    Research and development                    11,593,538          17,145,787           5,405,731
    Selling, general and administrative         11,535,118           6,067,445           3,679,317
                                              ------------        ------------        ------------
       Total operating expenses                 50,907,524          46,990,447          16,067,923
                                              ------------        ------------        ------------

 Loss from operations                             (583,223)        (20,452,559)         (1,160,174)

 Interest income                                 1,543,011           2,444,836           1,793,691
 Interest expense                                 (690,869)           (645,395)           (346,183)
                                              ------------        ------------        ------------
 Income (loss) before income taxes                 268,919         (18,653,118)            287,334
 Income taxes                                     (117,000)                 --             (20,000)
                                              ------------        ------------        ------------
 Net income (loss)                            $    151,919        $(18,653,118)       $    267,334
                                              ============        ============        ============

Basic income (loss) per share                 $       0.01        $      (1.14)       $       0.03
                                              ============        ============        ============
Diluted income (loss) per share               $       0.01        $      (1.14)       $       0.02
                                              ============        ============        ============

Shares used in computing:
   Basic income (loss) per share                16,967,124          16,312,194           8,970,183
                                              ============        ============        ============
   Diluted income (loss) per share              18,241,349          16,312,194          15,422,755
                                              ============        ============        ============
</TABLE>


                             SEE ACCOMPANYING NOTES.



                                       F-4
<PAGE>   46

                         AURORA BIOSCIENCES CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                       THREE YEARS ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                   PREFERRED STOCK                      COMMON STOCK                ADDITIONAL
                                            ------------------------------      ------------------------------        PAID-IN
                                               SHARES            AMOUNT            SHARES            AMOUNT           CAPITAL
                                            ------------      ------------      ------------      ------------      ------------
<S>                                         <C>               <C>               <C>               <C>               <C>
Balance at December 31, 1996                   9,915,973      $      9,916         2,865,156      $      2,865      $ 18,887,790
  Costs incurred in connection with
     issuance of Series D preferred                   --                --                --                --           (37,485)
     stock

  Conversion of Series A, B, C and D
     preferred stock into common stock        (9,915,973)           (9,916)        9,915,973             9,916                --
  Exercise of warrants to purchase
     common stock                                     --                --            45,290                45               (45)
  Issuance of common stock, net                       --                --         4,206,466             4,207        37,905,268
  Deferred compensation related to
     stock and stock options                          --                --                --                --         3,741,944
  Amortization of deferred compensation               --                --                --                --                --
  Net income                                          --                --                --                --                --
                                            ------------      ------------      ------------      ------------      ------------
Balance at December 31, 1997                          --                --        17,032,885            17,033        60,497,472
  Issuance of common stock, net                       --                --           125,369               125           511,510
  Issuance of common stock for
     acquired technology                              --                --            75,000                75           569,456
  Repurchases of common stock                         --                --          (208,335)             (208)          (24,436)
  Deferred compensation related to
     stock and stock options                          --                --                --                --           (57,160)
  Amortization of deferred compensation               --                --                --                --                --
  Net loss                                            --                --                --                --                --
                                            ------------      ------------      ------------      ------------      ------------
Balance at December 31, 1998                          --                --        17,024,919            17,025        61,496,842
  Issuance of common stock, net                       --                --           439,515               440         1,836,939
  Repurchases of common stock                         --                --           (21,693)              (22)           (2,671)
  Deferred compensation related to
     stock and stock options                          --                --                --                --          (576,762)
  Amortization of deferred compensation               --                --                --                --                --
  Net income                                          --                --                --                --                --
  Unrealized loss from investments                    --                --                --                --                --

    Comprehensive income
                                            ------------      ------------      ------------      ------------      ------------

BALANCE AT DECEMBER 31, 1999                          --      $         --        17,442,741      $     17,443      $ 62,754,348
                                            ============      ============      ============      ============      ============

</TABLE>

<TABLE>
<CAPTION>
                                             ACCUMULATED
                                                OTHER                                               TOTAL
                                            COMPREHENSIVE       DEFERRED        ACCUMULATED      STOCKHOLDERS'
                                                LOSS          COMPENSATION        DEFICIT       EQUITY (DEFICIT)
                                            ------------      ------------      ------------      ------------
<S>                                         <C>               <C>               <C>             <C>
Balance at December 31, 1996                $         --      $   (371,573)     $ (3,345,207)     $ 15,183,791
  Costs incurred in connection with
     issuance of Series D preferred                   --                --                --           (37,485)
     stock

  Conversion of Series A, B, C and D
     preferred stock into common stock                --                --                --                --
  Exercise of warrants to purchase
     common stock                                     --                --                --                --
  Issuance of common stock, net                       --                --                --        37,909,475
  Deferred compensation related to
     stock and stock options                          --        (3,513,702)               --           228,242
  Amortization of deferred compensation               --           812,715                --           812,715
  Net income                                          --                --           267,334           267,334
                                            ------------      ------------      ------------      ------------
Balance at December 31, 1997                          --        (3,072,560)       (3,077,873)       54,364,072
  Issuance of common stock, net                       --                --                --           511,635
  Issuance of common stock for
     acquired technology                              --                --                --           569,531
  Repurchases of common stock                         --                --                --           (24,644)
  Deferred compensation related to
     stock and stock options                          --            57,160                --                --
  Amortization of deferred compensation               --           774,794                --           774,794
  Net loss                                            --                --       (18,653,118)      (18,653,118)
                                            ------------      ------------      ------------      ------------
Balance at December 31, 1998                          --        (2,240,606)      (21,730,991)       37,542,270
  Issuance of common stock, net                       --                --                --         1,837,379
  Repurchases of common stock                         --                --                --            (2,693)
  Deferred compensation related to
     stock and stock options                          --           576,762                --                --
  Amortization of deferred compensation               --           833,732                --           833,732
  Net income                                          --                --           151,919           151,919
  Unrealized loss from investments               (48,567)               --                --           (48,567)
                                                                                                  ------------
    Comprehensive income                         103,352
                                            ------------      ------------      ------------      ------------
BALANCE AT DECEMBER 31, 1999                $    (48,567)     $   (830,112)     $(21,579,072)     $ 40,314,040
                                            ============      ============      ============      ============
</TABLE>


                             SEE ACCOMPANYING NOTES.


                                      F-5

<PAGE>   47

                         AURORA BIOSCIENCES CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                          ------------------------------------------------
                                                                              1999              1998              1997
                                                                          ------------      ------------      ------------
<S>                                                                       <C>               <C>               <C>
Operating activities:
Net income (loss)                                                         $    151,919      $(18,653,118)     $    267,334
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:

  Depreciation and amortization                                              3,234,928         2,421,986           964,323
  Amortization of deferred compensation                                        833,732           774,794           812,715
  Other non-cash items, net                                                   (184,000)          569,531                 -
  Changes in operating assets and liabilities:

    Accounts receivable                                                     (1,532,194)         (543,125)       (2,090,643)
    Prepaid expenses and other current assets                               (1,186,965)         (253,829)         (929,143)
    Other assets                                                            (1,932,531)       (1,480,639)         (230,376)
    Accounts payable and accrued compensation                                2,284,134         2,376,668           999,451
    Other current liabilities                                                   50,506           163,916           227,778
    Unearned revenue                                                         7,774,015           116,832         2,074,001
    Other noncurrent liabilities                                                     -          (154,346)          154,346
                                                                          ------------      ------------      ------------
Net cash provided by (used in) operating activities                          9,493,544       (14,661,330)        2,249,786
Investing activities:
  Purchases of short-term investments                                      (10,893,919)      (23,015,257)      (24,459,286)
  Sales and maturities of short-term investments                             8,709,647        30,205,000         7,974,422
  Purchases of property and equipment                                       (1,578,576)       (2,837,991)       (1,951,776)
  Notes receivable from officers and employees                                 235,000          (130,000)          (90,000)
  Restricted cash                                                              426,224           215,889        (1,311,923)
  Other assets                                                                       -        (2,436,279)         (339,283)
                                                                          ------------      ------------      ------------
Net cash provided by (used in) investing activities                         (3,101,624)        2,001,362       (20,177,846)
Financing activities:
  Issuance of convertible preferred stock, net                                       -                 -           (37,485)
  Issuance of common stock, net                                              1,738,686           486,991        37,909,475
  Proceeds from capital lease and loan obligations                             619,225                 -                 -
  Principal payments on capital lease and loan obligations                  (2,293,395)       (1,517,797)         (689,278)
                                                                          ------------      ------------      ------------
Net cash provided by (used in) financing activities                             64,516        (1,030,806)       37,182,712
                                                                          ------------      ------------      ------------
Net increase (decrease) in cash and cash equivalents                         6,456,436       (13,690,774)       19,254,652
Cash and cash equivalents at beginning of year                               9,477,916        23,168,690         3,914,038
                                                                          ------------      ------------      ------------
Cash and cash equivalents at end of year                                  $ 15,934,352      $  9,477,916      $ 23,168,690
                                                                          ============      ============      ============
Supplemental disclosure of cash flow information:
  Interest paid                                                           $    690,869      $    645,395      $    346,183
                                                                          ============      ============      ============
Supplemental schedule of non-cash investing and financing activities:
  Property and equipment acquired under capital leases and
    loans                                                                 $  1,701,489      $  3,755,413      $  3,802,971
                                                                          ============      ============      ============
</TABLE>

                             SEE ACCOMPANYING NOTES.


                                      F-6


<PAGE>   48

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

Aurora Biosciences Corporation ("Aurora" or the "Company") was incorporated in
California on May 8, 1995 and subsequently re-incorporated in Delaware on
January 22, 1996. The Company combines innovative biotechnology with its novel,
high technology, automation and software to provide solutions to challenges in
drug discovery for the pharmaceutical and biotechnology industries. Aurora's
core technologies include a broad portfolio of proprietary fluorescence assay
technologies; its functional genomics GenomeScreen-TM- program; as well as its
ultra-high throughput screening system ("UHTSS-TM- Platform") and subsystems to
miniaturize and automate assays derived from those technologies within a
computer-controlled integrated system, capable of searching through expansive
libraries of compounds to identify those that might lead to new medicines.

To date, the Company's revenue has been generated from a limited number of
customers in the biotechnology and pharmaceutical industries in the U.S. and
Europe. In 1999, greater than 10% of the Company's revenue resulted from
transactions with each of the following customers: Pfizer, Inc. ("Pfizer")
(21%), Warner-Lambert Company ("Warner-Lambert") (19%), Merck & Co., Inc.
("Merck") (16%) and Bristol-Myers Squibb Company ("BMS") (13%). The loss of such
customers could have a material adverse impact on the Company.

CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES

The Company considers all highly liquid investments with maturities of three
months or less from the date of purchase to be cash equivalents. Management
determines the appropriate classification of its cash equivalents and investment
securities at the time of purchase and reevaluates such determination as of each
balance sheet date. Management has classified the Company's cash equivalents and
investment securities as available-for-sale securities in the accompanying
financial statements. Available-for-sale securities are carried at fair value,
with unrealized gains and losses reported in other comprehensive income (loss).
The cost of debt securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion, as well as interest and dividends, are included in
interest income. Realized gains and losses are also included in interest income.
The cost of securities sold is based on the specific identification method.

The Company invests its excess cash in U.S. government and agency securities,
debt instruments of financial institutions and corporations and money market
funds with strong credit ratings. The Company has established guidelines
regarding diversification of its investments and their maturities which are
designed to maintain safety and liquidity.

EQUIPMENT, FURNITURE AND LEASEHOLDS

Equipment, including capitalized leased equipment, furniture and leaseholds, is
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization is calculated using the straight-line method over the shorter of
the estimated useful lives of the respective assets (generally three to five
years) or the term of the applicable lease.

OTHER ASSETS

Equity investments in closely-held companies are carried at cost and reviewed
quarterly for permanent impairment. Patents are carried at cost and amortized
using the straight-line method over the expected useful lives, which are
estimated to be four to eight years. Chemical compounds are carried at cost and
amortized over the expected useful lives, which are estimated to be five years.

LONG-LIVED ASSETS

The Company investigates potential impairments of its long-lived assets when
there is evidence that events or changes in circumstances may have made recovery
of an asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected undiscounted future cash flows is less than the carrying
amount of the asset. The Company has not identified any such losses.


                                      F-7


<PAGE>   49

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

WARRANTY RESERVE

Estimated expenses for warranty obligations are accrued as revenue is
recognized. Reserve estimates are adjusted periodically to reflect actual
experience.

STOCK OPTIONS

In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for its employee stock options. Under APB 25, if the purchase price of
restricted stock or the exercise price of the Company's employee stock options
equals or exceeds the fair value of the underlying stock on the date of issuance
or grant, no compensation expense is recognized. Option grants to non-employees
are valued in accordance with SFAS 123 and EITF 96-18 and are therefore expensed
at fair value as services are performed.

REVENUE RECOGNITION

Revenue under collaborative agreements with UHTSS syndicate customers typically
consists of non-refundable, non-creditable upfront fees, ongoing research and
co-development payments, and milestone, royalty and other contingent payments.
Revenue from ongoing research and co-development payments is recognized ratably
over the term of the agreement, and the Company believes such payments will
approximate the research and development expense being incurred associated with
the agreement. The Company does not have an obligation to refund, nor does there
exist the presumption of an obligation to refund, ongoing research and
co-development payments. Revenue from milestone or other contingent payments is
recognized upon satisfaction of the contractual terms of the milestone or
contingency. Revenue from equipment sales under short-term production contracts
is recognized using the completed contract method. Revenue from equipment sales
under long-term production contracts is recognized using the percentage of
completion method, measured based on costs incurred to-date compared to
estimated costs at completion. In 1999, the Company entered into its first
long-term production contract. As of December 31, 1999, revenue recognized
exceeded billings on the contract by $1.9 million and such amount is included in
accounts receivable in the accompanying balance sheet. License revenue is
recognized ratably over the term of the licensing agreement. Revenue from
royalty payments will be recognized upon applicable product sales.

Revenue from screen development, screening and other services is recognized as
the services are performed or ratably over the service period if the Company
believes such method will approximate the expense being incurred. Revenue from
upfront fees is deferred and recognized over the service period. Advance
payments received in excess of amounts earned through performance are classified
as unearned revenue. Revenue under cost reimbursement contracts is recognized as
the related costs are incurred.

RESEARCH AND DEVELOPMENT EXPENSE

All research and development costs are expensed in the period incurred.
Customer-sponsored research and development expenses totaled approximately $4.6
million, $5.7 million and $1.8 million in 1999, 1998 and 1997, respectively.
Company-sponsored research and development expenses totaled approximately $7.0
million, $11.4 million and $3.6 million in 1999, 1998 and 1997, respectively.

INCOME (LOSS) PER SHARE

In accordance with Statement of Financial Accounting Standards No. 128, EARNINGS
PER SHARE ("SFAS 128"), basic income (loss) per share is calculated based upon
the weighted average shares of common stock outstanding during the period, and
excludes any dilutive effects of options, warrants and convertible securities.
In 1999 and 1997, diluted income per share also gives effect to all potential
dilutive common shares outstanding during the period. In 1998, all potential
dilutive common shares have been excluded from the calculation of diluted loss
per share as their inclusion would be anti-dilutive.


                                      F-8


<PAGE>   50

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEGMENT INFORMATION

Statement of Financial Accounting Standards No. 131, SEGMENT INFORMATION ("SFAS
131"), requires disclosure of certain financial information about operating
segments, products, services and geographic areas in which they operate. The
Company has not reported segment information because the Company operates in
only one business segment.

EFFECT OF NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("SFAS 133"), which will be effective January 1, 2001.
This Statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments imbedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has not yet determined what impact SFAS
133 will have on the financial statements.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101)
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 is effective the first fiscal quarter
of fiscal years beginning after December 15, 1999 and requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with APB Opinion No. 20,
"Accounting Changes." The Company is currently in the process of evaluating the
impact, if any, SAB 101 will have on the financial position or results of
operations of the Company.

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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

2.      CASH EQUIVALENTS AND INVESTMENT SECURITIES

A summary of cash equivalents and available-for-sale investment securities is
shown below:

<TABLE>
<CAPTION>
                                                                             GROSS          GROSS
                                                                          UNREALIZED      UNREALIZED      ESTIMATED FAIR
                                                           COST              GAINS          LOSSES           VALUE
                                                       ------------      ------------     ------------     ------------
<S>                                                    <C>               <C>              <C>             <C>
DECEMBER 31, 1999
Money market funds                                     $  4,622,220      $         --     $         --     $  4,622,220
U.S. government and agency securities                     9,934,933               220            3,096        9,932,057
U.S. corporate securities                                15,944,345               203           45,894       15,898,654
                                                       ------------      ------------     ------------     ------------
   Total debt securities                                 30,501,498               423           48,990       30,452,931
Less amounts classified as cash equivalents              (9,769,235)               --               --       (9,769,235)
                                                       ------------      ------------     ------------     ------------
   Total investment securities, available-for-sale     $ 20,732,263      $        423     $     48,990     $ 20,683,696
                                                       ============      ============     ============     ============

DECEMBER 31, 1998
Money market funds                                     $  1,627,317      $         --     $         --     $  1,627,317
U.S. government and agency securities                    14,134,679                --               --       14,134,679
U.S. corporate securities                                12,263,312                --               --       12,263,312
                                                       ------------      ------------     ------------     ------------
   Total debt securities                                 28,025,308                --               --       28,025,308
Less amounts classified as cash equivalents              (9,477,317)               --               --       (9,477,317)
                                                       ------------      ------------     ------------     ------------
   Total investment securities, available-for-sale     $ 18,547,991      $         --     $         --     $ 18,547,991
                                                       ============      ============     ============     ============
</TABLE>


                                      F-9


<PAGE>   51

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


Realized gains or losses on sales of available-for-sale securities in 1999, 1998
and 1997 were not significant. The net adjustment to unrealized holding gains
(losses) on available-for-sale securities included in comprehensive income
totaled $48,567, net of tax, in 1999. The estimated fair value of
available-for-sale debt securities as of December 31, 1999 by contractual
maturity is as follows: $16.7 million due within one year and $4.0 million due
in one to two years.

3.      NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES

Notes receivable from officers and employees generally consist of relocation and
housing loans to assist in the relocation of new employees. These notes are
generally secured by a deed of trust on the individual's principal residence.
Notes receivable as of December 31, 1999 include separate loans to officers of
the Company of $60,000, $40,000 and $15,000. The $60,000 note is interest-free
and is due in 2003, but will be forgiven in four annual increments provided that
such officer remains an employee of the Company. The $40,000 note bears interest
payable monthly at approximately 6% per annum and is due in 2001, but will be
forgiven in $20,000 increments during 2000 provided that such officer remains an
employee of the Company. The $15,000 note bears interest payable monthly at
approximately 6% per annum and is due in 2002.

4.      BALANCE SHEET DETAILS

Equipment, furniture and leaseholds consists of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                   ------------------------------
                                                       1999              1998
                                                   ------------      ------------
<S>                                                <C>               <C>
Scientific equipment                               $  6,300,449      $  5,394,363
Office furniture, computers and equipment             5,135,901         4,109,911
Leasehold improvements                                5,335,996         4,887,714
Construction in process                               1,636,249                 -
                                                   ------------      ------------
                                                     18,408,595        14,391,988

Less accumulated depreciation and amortization       (6,516,197)       (3,528,631)
                                                   ------------      ------------
                                                   $ 11,892,398      $ 10,863,357
                                                   ============      ============
</TABLE>

The cost of equipment, furniture and leaseholds under capital leases and loans
at December 31, 1999 and 1998 was $11,469,708 and $9,148,994, respectively. The
accumulated depreciation and amortization of equipment, furniture and leaseholds
under capital leases and loans at December 31, 1999 and 1998 was $5,283,909 and
$2,693,324, respectively.

Other assets consist of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                        --------------------------
                                           1999           1998
                                        ----------     ----------
<S>                                     <C>            <C>
Chemical compounds                      $2,862,494     $1,148,654
Equity investments                       2,400,003      2,400,003
Patents and licenses                       905,081        675,426
Deposits, noncurrent                             -        994,868
                                        ----------     ----------
                                        $6,167,578     $5,218,951
                                        ==========     ==========
</TABLE>

The above amounts are net of accumulated amortization of patents, licenses and
compounds of $297,173 and $32,912 at December 31, 1999 and 1998, respectively.

5.      COMMITMENTS

CONSULTING AGREEMENTS

The Company has entered into various consulting agreements with its Scientific
Advisors and others for aggregate minimum annual fees of approximately $90,000
over the next four years. The agreements are cancelable by either party upon 60
or 90 days written notice. During the years ended December 31, 1999, 1998 and
1997, the Company expensed approximately $190,000, $250,000 and $440,000,
respectively, of fees and expense reimbursements related to these agreements.


                                      F-10


<PAGE>   52

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5.      COMMITMENTS (CONTINUED)

TECHNOLOGY AND LICENSE AGREEMENTS

The Company has entered into various strategic technology and license agreements
with third parties pursuant to the development of its screening systems and the
synthesis of chemical compounds. These agreements contain varying terms and
provisions which require the Company to make payments to the third parties,
subject to satisfactory performance by the third parties. Pursuant to these
agreements, the Company paid approximately $1,700,000, $1,400,000 and $850,000
in 1999, 1998 and 1997, respectively, and is obligated to pay a total of
approximately $4.5 million over the next four years.

The Company has also entered into various license agreements with corporations
and academic institutions regarding rights to certain inventions and
technologies. Most such agreements may be terminated by the Company with 60 days
written notice without significant financial penalty. Pursuant to these
agreements, the Company paid approximately $520,000, $1,070,000 and $140,000 in
1999, 1998 and 1997, respectively, and is obligated to pay a total of
approximately $1.2 million over the next four years.

LEASES AND LOANS

The Company leases its facilities and certain equipment under operating lease
agreements which expire at various dates through September 2008. The facilities
lease agreement is secured by a letter of credit totaling $0.7 million, which is
secured by a certificate of deposit. At December 31, 1999, such restricted cash
totaling $670,000 was included in noncurrent assets. The letter of credit will
be reduced over the next two years on a predetermined schedule. Rent expense
totaled approximately $1,595,000, $1,593,000 and $1,205,000 in 1999, 1998 and
1997, respectively.

In November 1997, the Company subleased certain of its facilities to a third
party under an operating lease which expired in October 1999. Total sublease
income in 1999, 1998 and 1997 included as a credit to rent expense is $763,000,
$935,000 and $79,000, respectively.

The Company leases certain equipment and improvements under capital lease and
loan agreements which expire at various dates through November 2003. Unused
capital loans available at December 31, 1999 totaled $1.7 million.

Annual future minimum lease payments for operating and capital leases and loans
as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                                              CAPITAL LEASES AND
                                                     OPERATING LEASES               LOANS
                                                       -----------              -----------
<S>                                                  <C>                      <C>
Years ended December 31,
2000                                                   $ 1,745,627              $ 3,028,490
2001                                                     1,797,515                2,290,360
2002                                                     1,852,071                2,001,069
2003                                                     1,907,633                  509,666
2004                                                     1,963,818                        -
Thereafter                                               7,899,858                        -
                                                       -----------              -----------
Total minimum lease and loan payments                  $17,166,522                7,829,585
                                                       ===========
Less amounts representing interest                                                 (989,813)
                                                                                -----------
Present value of capital lease and loan payments                                  6,839,772
Less current portion                                                             (2,497,046)
                                                                                -----------
Capital lease and loan obligations, noncurrent                                  $ 4,342,726
                                                                                ===========
</TABLE>



                                      F-11


<PAGE>   53

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.      STOCKHOLDERS' EQUITY

COMMON STOCK

Certain shares of common stock have been issued to founders, directors and
employees of, and consultants to, the Company. In connection with certain stock
purchase agreements, the Company has the option to repurchase, at the original
issue price, any unvested shares in the event of termination of employment or
engagement. Shares issued under these agreements generally vest over four years.
At December 31, 1999, 84,667 shares of common stock were subject to repurchase
by the Company.

DEFERRED COMPENSATION

The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the price per share of
restricted stock issued or the exercise price of stock options granted and the
fair value of the Company's common stock at the date of issuance or grant.

STOCK OPTION AND PURCHASE PLANS

In 1996, the Company adopted the 1996 Stock Plan (the "Stock Plan"), under
which, as amended, 6,000,000 shares of the Company's common stock were reserved
for future issuance. The Stock Plan provides for the grant of incentive stock
options and stock appreciation rights to employees and nonstatutory stock
options and stock purchase rights to employees, directors and consultants. All
options granted under the Stock Plan expire not later than ten years from the
date of grant and vest and become fully exercisable after not more than five
years of continued employment or engagement. Options generally vest over four
years, with one-fourth of the shares vesting after one year and the remainder
vesting monthly over the next thirty-six months. The exercise price of incentive
stock options must be equal to at least the fair market value of the Company's
common stock on the date of grant, and the exercise price of nonstatutory
options may be no less than 85% of the fair market value of the Company's common
stock on the date of grant.

In 1997, the Company adopted a Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"), under which 240,000 shares of the Company's common stock
were reserved for future issuance. All options granted under the Directors' Plan
expire no later than ten years from the date of grant and vest and become fully
exercisable after not more than four years of continued service. Options issued
to date generally vest monthly over four years. The exercise price of each
option must be equal to the fair market value of the Company's common stock on
the date of grant.

In 1997, the Company adopted an Employee Stock Purchase Plan (the "Purchase
Plan"), under which, as amended, 700,000 shares of the Company's common stock
were reserved for future issuance. The Purchase Plan provides for all eligible
employees to purchase the Company's common stock through payroll deductions at a
price equal to 85% of the lesser of the fair market value per share of the
Company's common stock on the start date of each overlapping two-year offering
period or on the date on which each semi-annual purchase period ends. At
December 31, 1999, 308,218 shares of common stock have been issued pursuant to
the Purchase Plan.

Pro forma information regarding net income (loss) and income (loss) per share is
required by SFAS 123, and has been determined as set forth below as if the
Company had accounted for stock options and shares issued under the Purchase
Plan under the fair value method of SFAS 123. The fair value of stock options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for 1999, 1998 and 1997:
risk-free interest rates of 6.57%, 4.59% and 5.44%, respectively; no annual
dividends; volatility factor of 60%; and an expected option life of five years.
The weighted-average fair value of stock options granted during 1999, 1998 and
1997 was $4.44, $4.15 and $3.33, respectively.

Shares issued under the Purchase Plan were valued based upon the difference, if
any, between the market value of the stock and the purchase price of the shares
on the date of purchase. The weighted-average fair value on the date of purchase
for stock purchased under this plan was $5.32, $5.32 and $5.19 in 1999, 1998 and
1997, respectively.


                                      F-12


<PAGE>   54

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.      STOCKHOLDERS' EQUITY (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of stock options
is amortized to expense over the options' respective vesting periods and the
estimated fair value of shares issued under the Purchase Plan are amortized to
expense over the respective offering periods. If compensation cost for the
Company's Stock and Purchase plans had been determined based on the fair value
at the grant date as defined by SFAS 123, the Company's pro forma results for
1999, 1998 and 1997 would have been as follows:

<TABLE>
<CAPTION>
                                                      1999                  1998                  1997
                                                 --------------        --------------        --------------
<S>                                              <C>                   <C>                   <C>
Pro forma loss                                   $   (4,031,014)       $  (19,587,000)       $     (124,000)

Pro forma basic and diluted loss per share       $        (0.24)       $        (1.20)       $        (0.01)
</TABLE>


The following table summarizes stock option activity under the Stock and
Directors' Plans and related information through December 31, 1999:

<TABLE>
<CAPTION>
                                                          WEIGHTED-
                                        NUMBER OF         AVERAGE
                                        OPTIONS        EXERCISE PRICE
                                       ----------        ----------
<S>                                    <C>             <C>
Outstanding at December 31, 1996            4,000        $     0.09
Granted                                 1,119,120        $     5.90
Exercised                                  (4,000)       $     1.15
Cancelled                                 (12,700)       $     5.02
                                       ----------
Outstanding at December 31, 1997        1,106,420        $     5.90
Granted                                 2,945,830        $     7.33
Exercised                                 (30,409)       $     1.40
Cancelled                              (1,277,351)       $    10.78
                                       ----------
Outstanding at December 31, 1998        2,744,490        $     5.23
Granted                                 1,347,261        $     8.20
Exercised                                (237,994)       $     3.57
Cancelled                                (334,754)       $     6.36
                                       ----------
Outstanding at December 31, 1999        3,519,003        $     6.38
                                       ==========
</TABLE>

At December 31, 1999, 2,095,964 shares remain available for grant under the
Stock and Directors' Plans.

In November 1998, the Board of Directors authorized a plan whereby employee
option holders could have exchanged all of his or her current vested and
unvested options on a one-for-one basis for new options priced at the market
value as of November 19, 1998. This plan was not available to members of the
Board of Directors and executive officers were not permitted to exchange options
with an exercise price of $10.00 or below, with the exception of one officer who
did not meet the criteria to be included as a "Named Executive Officer" in the
Company's Proxy Statement. Under this plan, an aggregate of 1,099,430 options
with an average exercise price of $11.04 per share were exchanged for options
with an exercise price of $5.25 per share. The replacement options vest and
expire based on the original grant date. The replacement options were not
exercisable until November 20, 1999. All replacement options are included in
grants and cancellations in the above summary of stock option activity.


                                      F-13


<PAGE>   55

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.      STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes information about stock options outstanding under
the Company's Stock and Directors' Plans at December 31, 1999:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                    ----------------------------------------------------       -------------------------------
                                     WEIGHTED-AVERAGE
                                        REMAINING
RANGE OF EXERCISE       NUMBER OF      CONTRACTUAL      WEIGHTED-AVERAGE        NUMBER OF     WEIGHTED-AVERAGE
      PRICES             OPTIONS          LIFE           EXERCISE PRICE          OPTIONS       EXERCISE PRICE
------------------- --------------   ---------------  ------------------       ----------     ----------------
<S>                 <C>              <C>              <C>                      <C>            <C>
$ 0.09 - $ 5.25         1,399,172          7.91           $   4.14               661,886          $   3.72
$ 5.34 - $ 6.72         1,011,176          9.18           $   6.15                23,207          $   6.12
$ 7.13 - $15.31         1,108,655          9.13           $   9.40               172,852          $   8.48
                    -------------                                              ----------
$ 0.09 - $15.31         3,519,003          8.66           $   6.38               857,945          $   4.75
                    =============                                              ==========
</TABLE>

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

At December 31, 1999, the Company has reserved shares of common stock for future
issuance as follows:

<TABLE>
<S>                                                        <C>
Common stock and stock options under 1996 Stock Plan       5,386,966
Common stock under Employee Stock Purchase Plan              391,782
Stock options under Directors' Plan                          228,001
Other                                                          4,000
                                                           ---------
                                                           6,010,749
                                                           =========
</TABLE>

7.      INCOME TAXES

The provision for income taxes on earnings subject to income taxes differs from
the statutory federal rate due to the following:

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                            ---------------------------------------------------
                                                                1999               1998                1997
                                                            -----------         -----------         -----------
<S>                                                         <C>                 <C>                 <C>
Federal income taxes (benefit)                              $    94,000         $(6,528,000)        $   101,000
State income tax, net of federal benefit                          1,000                  --               3,000
Tax effect of permanent differences                             330,000             414,000             301,000
Alternative minimum taxes                                       116,000                  --              17,000
Increase (decrease) in valuation allowance and other           (424,000)          6,114,000            (402,000)
                                                            -----------         -----------         -----------
                                                            $   117,000         $        --         $    20,000
                                                            ===========         ===========         ===========
</TABLE>

The provision for income taxes attributable to continuing operations consisted
of current federal income taxes of $116,000 and $17,000 in 1999 and 1997,
respectively, and current state income taxes of $1,000 and $3,000 in 1999 and
1997, respectively.

At December 31, 1999, the Company had federal income tax net operating loss
carryforwards of approximately $13,059,000. The federal tax loss carryforwards
will begin to expire in 2018, unless previously utilized. The Company also had
federal and California research tax credit carryforwards of approximately
$670,000 and $291,000, respectively, which will begin to expire in 2010 and
2012, respectively, unless previously utilized. The Company also had California
manufacturer's investment tax credit carryforwards of approximately $351,000,
which will begin to expire in 2005 unless previously utilized. Aurora has
federal and California alternative minimum tax credit carryforwards of
approximately $158,000 and $7,000, respectively, which may be carried forward
indefinitely.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, use of these net
operating loss and credit carryforwards may be substantially limited because of
cumulative changes in the Company's ownership of more than 50%. However, the
Company does not believe such limitations will have a material impact upon the
utilization of these carryforwards.


                                      F-14


<PAGE>   56

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


7.      INCOME TAXES (CONTINUED)

Significant components of the Company's net deferred tax assets as of December
31, 1999 and 1998 are shown below. Valuation allowances of $9,039,000 and
$9,148,000 at December 31, 1999 and 1998, respectively, have been recognized to
offset the net deferred tax assets as realization of such assets is uncertain.

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                       -------------------------------
                                                           1999                1998
                                                       -----------         -----------
<S>                                                    <C>                 <C>
Deferred tax assets:
  Net operating loss carryforwards                     $ 4,571,000         $ 7,048,000
  Deferred revenue                                       2,402,000                  --
  Tax credit carryforwards                               1,154,000           1,184,000
  Capitalized research and development                     779,000             915,000
  Other, net                                               865,000             346,000
                                                       -----------         -----------
  Total deferred tax assets                              9,771,000           9,493,000
Deferred tax liability:
  Depreciation                                            (732,000)           (345,000)
                                                       -----------         -----------
Net deferred tax assets                                  9,039,000           9,148,000
Valuation allowance for net deferred tax assets         (9,039,000)         (9,148,000)
                                                       -----------         -----------
Net deferred taxes                                     $        --         $        --
                                                       ===========         ===========
</TABLE>

8.      INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income
(loss) per share:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                        -----------------------------------------------------
                                                            1999                1998                1997
                                                        ------------        ------------         ------------
<S>                                                     <C>                 <C>                  <C>
Numerator:

  Net income (loss)                                     $    151,919        $(18,653,118)        $    267,334
                                                        ============        ============         ============

Denominator:
  Shares used in basic income (loss) per share
    computations - weighted average common
    shares outstanding                                    16,967,124          16,312,194            8,970,183

  Effect of dilutive securities:
    Convertible preferred stock                                   --                  --            4,591,231
    Nonvested common stock                                   184,628                  --            1,452,820
    Warrants                                                      --                  --               20,970
    Common stock options                                   1,089,597                  --              387,551
                                                        ------------        ------------         ------------

  Shares used in diluted income (loss) per share
   computations                                           18,241,349          16,312,194           15,422,755
                                                        ============        ============         ============
</TABLE>

For additional disclosures regarding nonvested common stock and common stock
options, see Note 6.

Basic income (loss) per share excludes the weighted average effects of the
Company's nonvested common stock totaling 184,628, 693,861 and 1,452,820 shares
for the years ended December 31, 1999, 1998 and 1997, respectively. Nonvested
common stock is not included in basic income (loss) per share until the
time-based vesting restrictions have lapsed. Options to purchase 2,744,490
shares of common stock and 349,428 shares of nonvested common stock were
outstanding at December 31, 1998 but were not included in the computation of
diluted earnings per share because the effect would be anti-dilutive.

In computing income (loss) per share for periods prior to the Company's IPO in
June 1997, the Company excluded the impact of convertible preferred stock to
conform to current interpretations by the Securities and Exchange


                                      F-15


<PAGE>   57

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Commission. For comparative purposes, basic income per share under the
if-converted method would have been $0.02 in 1997 with 13,561,414 weighted
average shares.

9.      401(K) RETIREMENT SAVINGS PLAN

In 1996, the Company adopted a 401(k) Retirement Savings Plan covering
substantially all employees who have completed certain service requirements.
Participants may contribute a portion of their compensation to the Plan through
payroll deductions. The Company paid Plan expenses totaling $7,000, $6,000 and
$3,000 in 1999, 1998 and 1997, respectively. Company matching contributions, if
any, are determined by the Company at its sole discretion. Company contributions
under the Plan totaled $167,000 and $120,000 in 1999 and 1998, respectively. No
Company contributions were made in 1997.

10.     COLLABORATIVE AGREEMENTS

The Company has entered into the following collaborative agreements:

ULTRA-HIGH THROUGHPUT SCREENING SYSTEM AND SCREEN DEVELOPMENT AGREEMENTS

The Company entered into collaborative agreements (the "Agreements") with BMS
and Eli Lilly and Company, Inc. ("Lilly") in 1996, Warner-Lambert and Merck in
1997, and Pfizer in 1999 (collectively, the "Collaborators") regarding the
development and installation of the Company's UHTSS Platform at each of the
Collaborators. Under the terms of each of the Agreements, the Company is
required to develop and separately install three modules to be integrated into
one complete UHTSS Platform. In return, the Collaborators are obligated to make
certain payments to the Company in the form of non-refundable upfront fees,
delivery or installation payments and ongoing research and co-development
funding. The Company is obligated to provide service and support for each
installed UHTSS Platform for a limited period of time.

The Company and the Collaborators will also co-develop high throughput screening
assays for use by the Collaborators. In addition to certain payments to be made
by the Collaborators for the use of these assays and assay technologies, the
Collaborators will also make certain milestone and royalty payments to the
Company if the Collaborators develop and commercialize certain compounds
identified using a screen developed by the Company.

The Collaborators may terminate the Agreements at any time without cause upon
written notice, provided that certain withdrawal payments are made. One of the
Agreements provide for penalties, defined at $2,777 per day up to $1 million,
payable by the Company if it fails to deliver the completed UHTSS Platform by a
specified time. As of December 31, 1999, the Company has not accrued for any
penalties.

In November 1999, the Company and Lilly agreed to amend their collaborative
research and license agreement and discontinue further development of Lilly's
UHTSS Platform. The companies continued their collaborative screen development
program and Lilly extended its license to certain Aurora technologies as part of
the amendment.

The Company entered into agreements with Warner-Lambert in 1998 and Pfizer in
1999 to develop an automated master compound storage ("AMCS-TM-") system for
long-term housing of chemical and biological compounds.

SCREENING SERVICES AGREEMENTS

In 1998, the Company entered into a collaboration with Cytovia, Inc., whereby
Aurora will provide screening services and access to its compound library. In
1999, Aurora entered into agreements to develop screening assays and/or provide
screening services with Pharmacia & Upjohn, Inc., F.Hoffman-LaRoche Ltd. and the
Cystic Fibrosis Foundation. The Company also entered into agreements with
Warner-Lambert, Becton Dickinson and Company and Merck to provide functional
genomics services using the Company's GenomeScreen-TM- technology. In addition,
Aurora entered into agreements in the area of ion channel drug discovery with
certain UHTSS Collaborators, Glaxo Wellcome and Wyeth-Ayerst Laboratories, the
Pharmaceutical Division of American Home Products Corporation. Under these
agreements, the Company will develop assays, deliver instrumentation and provide
ongoing scientific and technical support related to ion channels.

The Company intends to continue to enter into such agreements to provide
services. Such agreements vary in length and size, however, under these
agreements, the Company is required to develop screening assays and to perform


                                      F-16


<PAGE>   58

                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


screening services. The customer is obligated to make certain payments to the
Company in the form of upfront fees, development payments and fees for screening
services. Generally, the customer is also required to make certain milestones
and royalty payments to Aurora in the event of development and commercialization
of a compound identified using a screen developed by Aurora.

11.     SUBSEQUENT EVENT

In February 2000, the Company completed a private placement of 1.8 million
shares of newly issued Common Stock to selected institutional and other
accredited investors. The purchase price was $42.00 per share, resulting in net
proceeds of approximately $71 million.


                                      F-17