<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K


[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE FISCAL YEAR ENDED December 31, 1997

                                       or

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

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 or organization)                         Identification No.)
        

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

                                 (619) 452-5000
--------------------------------------------------------------------------------
              (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. [ ]

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 March 17, 1998, was
approximately $132.2 million*.

The number of shares of registrant's Common Stock outstanding as of March 17,
1998 was 17,032,593.

DOCUMENTS INCORPORATED BY REFERENCE:

Registrant's proxy statement filed in connection with the solicitation of
proxies for its 1998 Annual Meeting of Stockholders is incorporated by reference
into Part III of this Form 10-K.



----------
*Excludes 5,278,957 shares of Common Stock held by directors, executive officers
and stockholders whose ownership exceeds ten percent of the shares outstanding
on March 17, 1998. 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.


<PAGE>   2
                                     PART I

Except for the historical information contained herein, this Annual Report on
Form 10-K contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company. Such
statements are only predictions and involve a high degree of technological and
competitive risks and uncertainties that exist in the Company's operations and
business environment. The Company's actual events or results may differ
materially from those projected in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
risks associated with the Company's new and uncertain technology, dependence on
pharmaceutical and biotechnology collaborations and the development or
availability of competing systems, as well as those set forth in "Risk Factors"
and elsewhere in this Form 10-K.

ITEM 1.        BUSINESS

OVERVIEW

Aurora Biosciences Corporation ("Aurora" or the "Company") designs, develops and
sells proprietary drug discovery systems, services and technologies to
accelerate and enhance the discovery of new medicines by the pharmaceutical and
biopharmaceutical industries. Aurora is developing an integrated technology
platform comprised of a portfolio of proprietary fluorescent assay technologies
and its Ultra-high Throughput Screening System ("UHTSS") designed to allow assay
miniaturization and to overcome many of the limitations associated with the
traditional drug discovery process. The Company believes that this platform will
enable Aurora and its collaborators, which include Bristol-Myers Squibb
Pharmaceutical Research Institute ("BMS"), Eli Lilly and Company ("Lilly"),
Warner-Lambert Company ("Warner-Lambert") and Merck & Co., Inc. ("Merck"), to
take advantage of the opportunities created by recent advances in genomics and
combinatorial chemistry that have generated many new therapeutic targets and an
abundance of new small molecule compounds. Aurora believes its integrated
platform will accelerate the drug discovery process by shortening the time
required to identify high quality lead compounds and to optimize those compounds
into drug development candidates.

Aurora's goal is to become the leader in the development and commercialization
of technologies to accelerate and enhance the discovery of new medicines. The
Company's strategy is to diversify business risk by generating revenue from
multiple collaborators seeking to exploit Aurora's fluorescent assay
technologies and UHTSS in many different drug discovery programs. The Company
expects to generate revenue by developing screens, providing screening services,
providing functional genomics services, developing and providing the UHTSS to
syndicate members, licensing its proprietary technologies, and realizing royalty
and milestone payments from the development and commercialization of drug
candidates identified by its collaborators using Aurora's technologies. To date,
the Company has entered into collaborative agreements with BMS, Lilly,
Warner-Lambert and Merck to license the Company's fluorescent assay technologies
for their internal discovery research, to collaborate on screen development and
as initial members of a syndicate to co-develop the UHTSS for collaborative
research and for installation of the UHTSS in their own research facilities. In
addition, Aurora has developed screens for and/or has provided screening
services to Allelix Biopharmaceuticals, Inc. ("Allelix") and Roche Bioscience
("Roche").

THE DISCOVERY OF NEW MEDICINES

Drug discovery methods generally involve the synthesis and testing of large
libraries of different compounds in relatively simple assays, or tests,
containing targets designed to mimic aspects of a disease process. Assays are
employed to determine the effect of a compound upon a particular target. When
applied methodically, assays can be used as screens to identify active
chemicals, referred to as "hits," that may produce a desired effect upon a
target's function. Lead compounds can be identified by additional screening of
hits and may then be optimized to generate candidate compounds for development
as potential medicines.


                                       2

<PAGE>   3

TARGETS

Targets are specific biological molecules, often proteins such as receptors,
enzymes or ion channels, which are believed to play a role in the onset or
progression of disease. Most drugs are discovered through the identification of
compounds that modulate an established target's biological function. Recent
developments in molecular biology and genomics have led to a rapid increase in
the number of potential therapeutic targets available for drug discovery. The
chemical information required for cells to produce proteins is encoded in genes.
It is currently estimated that several thousand of the roughly 100,000 different
human genes encode potential targets. Functional genomics, the process of
determining the function of these genes and the proteins they encode, including
their evaluation as potential targets, can be a rate-limiting step in the
selection of novel targets for drug discovery. The large number of newly
discovered targets has created the need for faster screen development and higher
throughput screening.

COMPOUNDS

Traditionally, chemists laboriously synthesized new compounds one at a time, or
painstakingly isolated them from natural sources. During the last few years,
many industrial and academic groups have developed combinatorial chemistry
techniques to greatly increase the supply and diversity of small molecules for
screening. Already, many companies have used combinatorial chemistry to create
libraries of hundreds of thousands, or even millions, of small molecules
quickly. These large libraries are now available to be tested against both
established and novel targets to yield potential lead compounds for new
medicines. However, such vast numbers of compounds present a substantial
challenge to the drug discovery process and create a need for faster and more
efficient screening.

ASSAYS

Targets can be incorporated into either biochemical or cell-based assays.
Testing compounds on targets functioning in the environment of living human or
other mammalian cells may provide a number of advantages, including greater
predictive value of therapeutic effect and potential toxicity. In addition,
cell-based assays may be required to screen certain targets not readily amenable
to biochemical assays. However, cell-based assays have typically been more
difficult and time consuming both to develop and to perform due to difficulties
in detecting the activity of a target in a living cell and the inherent
technical complexities of using human or other mammalian cells in drug screens.

SCREENING

Screening is the process of methodically testing libraries of compounds for
potential therapeutic value by using assays to determine if one or more of the
compounds affect a selected target. Primary screening determines if any of the
compounds tested are hits. Re-testing confirms initial hits and secondary
screening refines the initial evaluation of hits. For example, secondary
screening may measure a hit's potency (the amount of the hit compound required
to exert its effect) and specificity (the degree to which the hit does not
affect unintended targets). These secondary screens help in selecting lead
compounds for further discovery efforts to identify candidate compounds for
development. Pharmaceutical and biotechnology companies with advanced drug
discovery programs use semi-automated or robotic high throughput screening
systems. Certain current best practice screening systems can operate at
throughputs of up to approximately 10,000 discrete compounds per day per system.

THE NEED TO IMPROVE THE DRUG DISCOVERY PROCESS

The discovery and development of new medicines remains an expensive,
time-consuming and often unsuccessful process. Although many pharmaceutical,
biotechnology and clinical research organizations have significantly improved
the efficiency of the drug development phase, only about five to ten percent of
candidate compounds entering development will ultimately be approved for
marketing. Candidate compounds that are identified in discovery frequently fail
in the development phase due to insufficient therapeutic benefit or unexpected
side effects. To date, efforts to improve the initial discovery process have not
been adequate to reduce development risks and bottlenecks.

The rapid increases in the number of potential targets and the size of compound
libraries resulting from advances in genomics and combinatorial chemistry,
respectively, have created a significant opportunity to discover greater 

                                       3



<PAGE>   4
numbers of higher quality lead compounds for development into medicines.
However, the increasing numbers of targets and compounds have created severe
bottlenecks in the drug discovery process. These bottlenecks result from the
difficulty of quickly analyzing function and disease relevance of newly
discovered targets, the complexity of incorporating the many different types of
targets into screens, and the inability to screen extensive compound libraries
quickly and at a reasonable cost.

If the discovery process were sufficiently improved, pharmaceutical and
biotechnology companies could more quickly and efficiently discover larger
numbers of higher quality candidate compounds that have a greater chance of
development into medicines that meet significant unmet needs.

AURORA'S APPROACH

TECHNOLOGY PLATFORM

To take advantage of the recent advances in genomics and combinatorial
chemistry, Aurora is developing an integrated technology platform consisting
principally of its proprietary fluorescent assay technologies and its highly
automated Ultra-high Throughput Screening System ("UHTSS"). Fluorescent assays
are currently being used to facilitate the drug discovery process through the
development of screens for its collaborators. These screens have either been
delivered to the collaborator or have been screened against hundreds of
thousands of compounds on Aurora's existing high throughput screening system. To
significantly advance current high throughput screening capabilities, Aurora is
developing the UHTSS which is expected to be fully operational within the next
two years. The system has been designed to screen over 100,000 discrete
compounds per day utilizing Aurora's miniaturized fluorescent assays. If
realized, this throughput would be over ten times faster than current
best-practice high throughput screening systems and would conserve expensive and
scarce compounds. The Company believes that this integrated technology platform
will allow Aurora and its collaborators to accelerate the drug discovery process
by shortening the time required to identify higher quality lead compounds and to
optimize those compounds into drug development candidates.

BUSINESS STRATEGY

Aurora's goal is to become the leader in the development and sale of
technologies, services and information to accelerate and enhance the discovery
of new medicines by the pharmaceutical and biopharmaceutical industries. The
Company intends to diversify business risk by exploiting Aurora's fluorescent
assay technologies and UHTSS in many different drug discovery programs with
multiple collaborators. To implement this strategy, the Company intends to:

   Support and Enhance the Syndicate for the Co-development of Aurora's UHTSS.
   Aurora has established a syndicate to co-develop Aurora's UHTSS. Each member
   is scheduled to receive its own UHTSS over a specified period for use in its
   internal drug discovery programs. Through the syndicate, Aurora is able to
   fund the development of the UHTSS and offer to its syndicate members
   co-exclusive access to the system. The Company believes that the payments
   made by each syndicate member will be significantly lower than the cost for
   any one company to develop a similar system on its own. The existing
   syndicate agreements provide for certain collaborators to purchase additional
   systems or components. The Company believes that these agreements represent a
   customer base that may provide an opportunity for significant further revenue
   generation as Aurora expands the UHTSS technology platform or develops
   enhancements to the system.

   Generate Revenue from Screen Development and Screening Services. Aurora
   generates revenue from multiple collaborators by developing screens,
   primarily on a non-exclusive basis, for diverse targets and providing
   screening services. The Company develops screens with respect to specific
   targets rather than for broad therapeutic areas. The developed screen is then
   either transferred to the collaborator for internal research or is utilized
   by Aurora to provide screening services. When Aurora provides such screening
   services, it will use a high throughput screening system to screen the
   compounds for and provide information and potential lead candidates to its
   collaborators. Aurora expects revenue from screening services to increase as
   its own UHTSS is brought on-line and additional compounds become available
   for use in screening customers' targets. Additionally, the Company is
   entitled to receive milestone payments and royalties with respect to
   compounds discovered through such screening services that are developed and
   commercialized.

                                       4
<PAGE>   5



   Form Functional Genomics Collaborations. The Company is seeking to establish
   corporate collaborations based on its novel program for functional genomics
   in human cells. This program is based primarily on the Company's
   Beta-lactamase reporter system and utilizes human cell lines. These
   collaborations could generate significant revenues for research services in
   analyzing gene function and rapidly generating novel cell-based assays for
   high throughput screening and lead identification in multiple therapeutic
   areas. The Company expects to negotiate milestones and royalties on compounds
   identified and developed through such research collaborations.

   Expand Compound Libraries. In providing screening services, Aurora will
   utilize compounds that are either supplied by its collaborators or from
   compound libraries to which Aurora has access. In order to increase the
   numbers of compounds available for Aurora and its collaborators, the Company
   plans to enter into collaborations with companies specializing in
   combinatorial chemistry that provide compound libraries and chemical
   optimization expertise, and to purchase compounds from available commercial
   sources.

   Develop Information Tools and Databases. Utilizing the fluorescent assay
   technologies and the UHTSS, the Company expects to have the ability to
   generate and analyze large amounts of complex information on molecular and
   genomic targets and large numbers of chemical structures. Aurora intends to
   exploit these applications of its technology either directly or in
   collaborations with leaders in the areas of informatics, genomics and drug
   discovery. Ultimately, the Company plans to leverage this information to
   create new revenue opportunities in the future.

   Maintain Technology Leadership. The Company has assembled a unique
   multi-disciplinary team of scientists from leading companies in the biology,
   chemistry, instrumentation, automation and computer science industries.
   Aurora intends to continue investing significantly in research and
   development in order to make advances in its core technologies and expand its
   technology platform in order to maintain its technology leadership. The
   Company also intends to continue to form strategic technology alliances with
   leading companies from each of these industries and with leading academic
   institutions to provide the Company with access to those parties'
   technologies and expertise.

AURORA'S TECHNOLOGY

The principal components of Aurora's integrated technology platform are its
proprietary fluorescent assay technologies, its human cell functional genomics
and its highly automated UHTSS that is being developed for screening
miniaturized assays. This unique platform results from the Company's innovative
integration of many different disciplines, including fluorescence chemistry,
biophysics, molecular biology, protein engineering, automation, process control,
optics, microfluidics, informatics and software development.

AURORA'S PROPRIETARY FLUORESCENT ASSAY TECHNOLOGIES

The Company has internally developed or licensed a broad range of proprietary
fluorescent assay technologies that the Company believes exhibit significant
advantages over existing screening assays. The Company's fluorescent assay
technologies utilize light glowing from fluorescent molecules to reveal
molecular and cellular activity with precision and sensitivity, generally
indicated by a change in color. Aurora's fluorescent assay technologies allow
monitoring of the function of tiny amounts of biomolecules in a non-destructive
manner. Therefore, many aspects of cell function can now be observed in single
living cells.

Aurora's portfolio of fluorescent assay technologies is designed to enable
screening of compounds against nearly all major classes of human drug targets,
including receptors, ion channels and enzymes, in most therapeutic areas. The
following chart summarizes several of Aurora's key fluorescent assay
technologies, together with examples of the classes of targets and therapeutic
areas to which they may be applicable:


                                       5

<PAGE>   6
<TABLE>
<CAPTION>

 ASSAY TECHNOLOGY           TARGET CLASSES                  THERAPEUTIC AREA
 ----------------           --------------                  ----------------
<S>                         <C>                             <C>   
BETA-LACTAMASE REPORTER     cell surface receptors,         most areas, including
GENE SYSTEM                 intra-cellular receptors        cardiovascular diseases,
(cell-based assays)         and signaling proteins          inflammation, cancer, central
                                                            nervous system diseases and
                                                            endocrine diseases

PROMISCUOUS G-PROTEINS      G-protein coupled receptors     most areas, including
(cell-based assays)                                         cardiovascular diseases,
                                                            inflammation, cancer, central
                                                            nervous system diseases and
                                                            endocrine diseases

MEMBRANE VOLTAGE            ion channels                    cardiac diseases, central nervous
REPORTERS (cell-based                                       system conditions and
assays)                                                     gastro-intestinal diseases

GFP REPORTERS               proteases, kinases and          AIDS, cardiovascular diseases,
(biochemical and            protein-protein                 degenerative brain diseases and
cell-based  assays)         interactions                    cancer

ADIFAB PROBE (biochemical   lipid metabolism                ischemia, inflammation, obesity,
assays)                                                     diabetes and immune dysfunction
</TABLE>

To date, only a limited number of targets have been incorporated into assays
utilizing the Company's fluorescent assay technologies. There can be no
assurance that the Company will be able to develop screening assays for each
target selected by its collaborators in a timely and cost-effective manner, or
if developed, that such assays will function as anticipated.

Beta-lactamase Reporter Gene System

The Company has successfully utilized an engineered bacterial enzyme,
Beta-lactamase, as a reporter gene in mammalian cells in assays suitable for
high throughput screening. The Company believes that its Beta-lactamase reporter
system is an important advance in reporter gene technology that can be used to
design drug screens for a number of major classes of drug targets as noted in
the chart above. Functional cell-based assays have a number of advantages over
the commonly used binding assays that detect interaction of test compounds with
targets isolated from their natural cellular environment. The Company's
Beta-lactamase reporter system allows drug screens to be constructed in the more
physiological environment of mammalian cells, does not require the use of
radioactivity and can readily distinguish between agonists and antagonists. In
addition, the Beta-lactamase reporter system can facilitate the search for
compounds acting on newly discovered target receptors where no natural ligands
have been identified, also known as orphan receptors. Certain aspects of the
Beta-lactamase reporter system were exclusively licensed from the Regents of the
University of California.

The Company believes that its Beta-lactamase reporter system has the potential
to greatly reduce both the time and cost of developing cell-based screens based
on the ability to measure activation responses in single living cells. Even with
modern techniques for making genetically engineered cells, cell line development
is an unpredictable process. Making cell lines for reporter gene assays with
current methods usually takes many months and involves testing hundreds or even
thousands of individual cell "clones" to generate a usable screening assay. In
contrast, the Beta-lactamase reporter system employs the power of
fluorescence-activated cell sorting, which can rapidly isolate the living cells
in which the reporter gene is connected to the right signaling elements. Thus,
with the Company's Beta-lactamase reporter system, development time for a target
into a cell-based assay can be reduced to weeks instead of months. The Company
has developed several screens using Beta-lactamase.

Promiscuous G-proteins

The Company has an exclusive license from the California Institute of Technology
to the use of novel "promiscuous" G-proteins, which are "universal adapters"
that couple to a wide range of receptors of this family of targets to a
signaling pathway that is well suited to certain of the Company's fluorescent
assays. Thus, the Company believes that its proprietary promiscuous G-protein
methods can be helpful in developing screens containing G-protein coupled
receptors previously difficult to incorporate into mammalian cell-based assays.
The promiscuous G-

                                       6


<PAGE>   7

proteins may also be useful in constructing screens for orphan receptors that
can be used to search for compounds that activate such receptors as tools to
help analyze the function of these newly discovered genes.

Membrane Voltage Reporters

Membrane proteins control membrane voltage, a fundamental property of cells.
Unregulated membrane voltage can cause serious medical conditions. Thus,
membrane proteins, particularly ion channels, help regulate membrane voltage and
can be targets for drug discovery in major disease areas such as neurology and
cardiology. Important medicines acting on ion channels include certain
anti-epileptic and anti-arrhythmic medicines. However, screening in this area is
typically limited to testing compounds with an electrical measuring apparatus,
which requires skilled scientists and has a low throughput of only tens of
compounds per day. There has been some success in adapting an existing type of
fluorescent probe of membrane voltage for semi-automated screening. The Company
believes that this approach is likely to have too slow of a response to report
on many relevant ion channel targets, and can be susceptible to artifacts which
limit assay performance.

Aurora's proprietary membrane voltage reporters incorporate fluorescence
technology to permit more reliable detection of changes in membrane voltage and
should provide faster responses. The Company believes that assays incorporating
its membrane voltage reporters will be adaptable for sub-types of ion channels,
several of which are currently the targets of screening programs in
pharmaceutical company research departments and in certain specialized
biotechnology companies.

In 1997, the Company developed and provided for one of its collaborators, an
instrument designed to permit the use of the Company's fluorescent voltage
sensor technology for high throughput screening of ion channel targets in 96
well plates. In addition, the Company has developed and delivered a screen for
an ion channel subtype for this collaborator.

Proprietary Variants of Green Fluorescent Protein

Green Fluorescent Protein ("GFP") is a naturally fluorescent protein discovered
in light-producing jellyfish. The fluorescence of GFP is an intrinsic property
of the protein and, therefore, the protein requires no additional chemicals to
make it fluoresce. This feature of GFP allows it to be expressed within
genetically engineered mammalian cells and to provide an intracellular reporter
with its own fluorescence. Using various techniques of protein engineering,
Aurora has developed several mutants, or variants, of the naturally occurring
type of GFP, which are readily expressed in mammalian cells and provide much
brighter fluorescence than that of the naturally occurring GFP protein. Certain
aspects of Aurora's technology related to GFP reporters are exclusively licensed
from the Regents of the University of California and from the University of
Oregon. The Company has also engineered variants that have significantly
different excitation and emission wavelengths and hence they fluoresce with
different colors. At present, the Company utilizes four main proprietary GFP
variants: cyan, blue, green and yellow.

The Company believes that the main application for GFP in drug discovery
requires the further engineering of GFP variants to produce reporters of
important biologic modifications to proteins, such as protein cleavage by
proteases and protein phosphorylation by protein kinases. The Company has
developed certain GFP protease and kinase assays. Additionally, the Company has
obtained an exclusive worldwide license from the University of California for
the cameleon indicators reported in Nature (Vol. 388, pages 882-887). These
indicators consist of fusion of pairs of differently colored mutants of GFP,
together with calmodulin and a calmodulin binding peptide. Such chimeric
proteins can be versatile reporters of free calcium concentration, an important
regulator of cell function and gene expression. Changes in calcium concentration
are reported by conformational changes in the indicator proteins via a
fluorescent signal. This approach to measuring intracellular signaling has the
advantage of using a genetically coded indicator that can be targeted to
specific sites such as the nucleus and endoplasmic reticulum. The Company
believes that the cameleon reporters demonstrate how GFP mutants can report
changes in protein structure and protein-protein interactions from within living
cells.

                                       7
<PAGE>   8



ADIFAB

Aurora has obtained an exclusive world-wide license from Lidak Pharmaceuticals
for the fluorescent reporter ADIFAB, for one-step determination of unbound free
fatty acids for screening for therapeutic compounds. The ADIFAB technology is
based on a genetically engineered fluorescent probe that provides a unique
method to measure unbound free fatty acid levels. The ADIFAB assay can provide
sensitive and reliable measurement that can be performed rapidly and is
amendable to high throughput screening to identify potential drug candidates
that modulate lipid pathways. Modulation of lipid metabolism may have
applications in many biological areas including signal transduction and energy
metabolism.

HUMAN CELL FUNCTIONAL GENOMICS

During 1997, the Company recruited a team of scientists to accelerate the
development of its functional genomics program. This program relies on the
proprietary Beta-lactamase gene reporter systems that enables quantitation of
transcription and clonal selection of single living cells without apparent
adverse effects (Science 279, 84-88, 1998). For functional analysis,
Beta-lactamase is introduced stochastically into the genome at saturating
frequencies in a range of immortalized human cell types. This results in a
living library of millions of individually tagged clones that can be used to
monitor real-time transcriptional responses to physiologic or pharmacologic
stimulation of human cells, and for sequence identification and molecular
cloning of the tagged genes.

This technology allows generation of information that can be used to elucidate
the signaling pathway(s) used by a specific target or molecule of interest
including: known or orphan GPCRs, cytokine receptors, transcription factors,
oncogenes, tumor suppressors genes, kinases, secreted proteins, ligands,
viruses, drugs or any other molecules that modulate signal transudation pathways
in human cells. A key advantage of this approach is that their sensitive and
reliable fluorescent readouts enable ultra-high throughput sorting, at rates
greater than 10 million cells per hour, of any desired clones by flow cytometry.
This "target set" of responsive cell clones can then be used for functional
analysis and cell-based high throughput screening.

AURORA'S ULTRA-HIGH THROUGHPUT SCREENING SYSTEM

The Company believes that because most current high throughput screening systems
have been developed without an adequately integrated design concept, it can be
challenging to improve performance at certain rate-limiting steps without
creating almost equally limiting bottlenecks elsewhere in the process. In
addition, the Company believes that many of these systems are designed to screen
only one class of target or one type of assay. To overcome these limitations and
to exploit the power of its fluorescent assay technologies, Aurora is developing
its UHTSS which is expected to be operational within the next two years. The
UHTSS is being designed using a fully integrated approach that combines a wide
array of expertise and technologies, key internally developed advances and the
technologies accessed through the Company's strategic technology alliances.

Automated Storage and Retrieval System

The UHTSS automated storage and retrieval component is designed to house over
1,500,000 compounds in solution for rapid access. The robotic systems for
storage and retrieval of compounds are being adapted from other industrial
settings where automated, rapid access to very large stores of small items has
been reliably deployed. Aurora's own proprietary innovations have been added to
adapt these advanced technologies to the UHTSS. 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 as well as allow ready
replenishment of the compound store from libraries in the master store. The
ability to deliver selected compounds to the screen at ultra-high rates under
computer control is a key advance offered by the Aurora platform. The automated
storage and retrieval system can facilitate high throughput screening in
conventional 96-well plates today, and has been accepted by both BMS and Lilly.

                                       8


<PAGE>   9
NanoPlates for Miniaturized Screening Assays

Another key component of Aurora's UHTSS is the NanoPlate (NanoPlateTM is a
trademark of the Company) which has 3,456 miniaturized wells in which
fluorescent assay screens may be performed. The Company has developed prototype
proprietary NanoPlates and is developing a manufacturing system for disposable
NanoPlates with external collaborators. A key feature is the small assay volume,
approximately 100 times smaller than in conventional screening assays. This
volume reduction is critical for reducing the cost per test and conserving
compound libraries that often consist of only very small amounts of each test
compound. The Company has so far successfully addressed most of the problems
inherent in such small assay volumes. The Company is developing its NanoPlates
to be compatible with most of Aurora's fluorescent assay technologies. Certain
cell-based and biochemical assays, based on the Company's fluorescent reporters,
have already been shown to work in prototype NanoPlates.

Microfluidics: Compound and Assay Component Dispensing

The Company, together with Packard Instrument Company ("Packard") is developing
novel microfluidic technologies to accurately transfer microscopic volumes of
the compounds, into the miniature assay wells of the NanoPlates, at rates of up
to 10,000 wells per hour. While current screening systems can dispense volumes
down to a microliter (one millionth of a liter), Aurora is developing
miniaturized screening dispensers capable of volumes less than one billionth of
a liter. These dispensers are being designed to remove compounds from the
storage plates and dispense precise sub-nanoliter volumes into the appropriate
wells of the NanoPlates at high speed. The Company intends to incorporate these
devices into proprietary robotic platforms designed to enable the precise
location of the various components in a manner superior to available compound
dispensing technology. To date, the Company has used prototype nanoliter
dispensing devices to perform test assays in prototype NanoPlates. The Company
believes that its microfluidic systems suitable for ultra-high throughput
screening will be operational in 1999.

Fluorescence Detector for NanoPlates

There are a number of fluorescence plate readers presently available that enable
the use of Aurora's proprietary fluorescent assays for high throughput screening
in 96-well plates. However, none of these provide the necessary sensitivity and
precision to enable ultra-high throughput miniaturized screens. Aurora is
collaborating with Packard to develop highly sensitive fluorescence detectors
capable of measuring miniaturized fluorescent assays in NanoPlates. The detector
is designed to record and process, in real time, data from more than 100,000
assays in 24 hours. The Company believes that the resulting quality of the
fluorescent assays should minimize the number of replicates required compared to
traditional screening, thereby increasing throughput and decreasing costs.
Currently Packard and the Company are finalizing the development of its
detector. The Company believes that detectors operational with NanoPlates can be
produced in the second half of 1998.

Informatics and System Integration

The UHTSS is being designed to link the automated storage and retrieval system
to existing chemistry information databases and master compound store
inventories through a user-friendly computer control system. The fully
integrated UHTSS will be designed to efficiently capture, process and deposit in
a centralized database the large amount of screening data from the UHTSS using
advanced software tools and systems from leading providers. While the basic
software and hardware components for the UHTSS informatics system are being
acquired from leading suppliers, the supervisory control systems, the subsystem
controllers for the instruments, the data analysis tools and overall system
architecture and database structure for the UHTSS are being developed by the
Company's in-house informatics team. The Company's UHTSS is expected to be fully
integrated and operational within the next two years.

CORPORATE COLLABORATIONS

Aurora has entered into a number of corporate collaborations relating to the
co-development of the Company's UHTSS and for screen development and screening
services. The Company's material collaborations and their major features are
summarized below:

                                       9


<PAGE>   10
Bristol-Myers Squibb. In November 1996, the Company and BMS entered into a
Collaborative Research and License Agreement (the "BMS Agreement") regarding the
development of the Company's UHTSS and the installation of a UHTSS at BMS. Under
the terms of the BMS Agreement, the Company is required to develop and
separately install three components to be integrated into one complete UHTSS. In
return, BMS is obligated to make certain payments to the Company in the form of
non-refundable upfront fees, installation payments and ongoing research and
co-development funding. The Company is obligated to provide service and support
for the UHTSS installed at BMS for a limited period of time. The first UHTSS
component, the storage and retrieval unit, was accepted by BMS in November 1997.

The Company and BMS will also co-develop high throughput screening assays for
use by BMS in exchange for specified fees from BMS. Certain target screens
developed by the Company for BMS will be exclusive for a limited period of time.
In exchange for certain additional payments to Aurora, BMS will also have the
right to use the Company's fluorescent assay technologies for internal research
and drug development, including the development of screening assays. BMS will
also make certain milestone and royalty payments to Aurora principally for
compounds developed and commercialized by BMS which were identified using a
screen developed by Aurora.

Under the terms of the BMS Agreement, subject to certain conditions, the UHTSS
syndicate is restricted to six members for a limited period. BMS may withdraw
from the development of the UHTSS at any time without cause, provided that
certain withdrawal payments have been made. BMS may also withdraw from the
development of the UHTSS for "good cause," as defined in the agreement, without
obligation to make further payments relating to development of the UHTSS. Each
party also has the right to terminate the agreement upon the material breach by
the other party of its obligations under the agreement. The BMS Agreement also
provides for penalties payable by the Company if it fails to deliver the
completed UHTSS by a specified time.

Eli Lilly and Company. In December 1996, the Company and Lilly entered into a
Collaborative Research and License Agreement (the "Lilly Agreement") regarding
the development of the Company's UHTSS and the installation of a UHTSS at Lilly.
Under the terms of the Lilly Agreement, the Company is required to develop and
separately install three components to be integrated into one complete UHTSS. In
return, Lilly is obligated to make certain payments to the Company in the form
of non-refundable upfront fees, delivery payments and ongoing co-development
funding. The Company is obligated to provide service and support for the UHTSS
installed at Lilly for a limited period. The first UHTSS component, the storage
and retrieval unit, was accepted by Lilly in December 1997.

The Company and Lilly will also co-develop high throughput screening assays for
use by Lilly in exchange for specified fees from Lilly. In exchange for certain
additional payments to Aurora, Lilly will also have the right to use the
Company's fluorescent assay technologies for internal research and drug
development, including the development of screening assays. Lilly will also make
certain milestone and royalty payments to Aurora principally for compounds
developed and commercialized by Lilly which were identified using a screen
developed by Aurora, subject to certain limitations on the royalties.

Under the terms of the Lilly Agreement, subject to certain conditions, the UHTSS
syndicate is restricted to six members for a limited period of time. Lilly may
terminate the agreement at any time without cause upon 45 days written notice to
Aurora, provided that certain withdrawal payments are made. Each party has the
right to terminate the agreement upon the material breach by the other party of
its obligations under the agreement. The Lilly Agreement also provides for
penalties payable by the Company if it fails to deliver the completed UHTSS by a
specified time.

Warner-Lambert Company. In September 1997, the Company and Warner-Lambert
entered into a Collaborative Research and License Agreement (the "Warner-Lambert
Agreement") regarding the development of the Company's UHTSS and the
installation of a UHTSS at Warner-Lambert. Under the terms of the Warner-Lambert
Agreement, the Company is required to develop and separately install three
components to be integrated into one complete UHTSS. In return, Warner-Lambert
is obligated to make certain payments to the Company in the form of
non-refundable upfront fees, milestone payments, delivery payments and ongoing
co-development funding. The Company is obligated to provide service and support
for the UHTSS installed at Warner-Lambert for a limited period.

                                       10
<PAGE>   11
The Company and Warner-Lambert will also co-develop high throughput screening
assays for use by the Company on its current high throughput screening system
and for use by Warner-Lambert in exchange for specified fees from
Warner-Lambert. In exchange for certain additional payments to Aurora,
Warner-Lambert will also have the right to use the Company's fluorescent assay
technologies for internal research and drug development, including the
development of screening assays. Warner-Lambert will also make certain milestone
and royalty payments to Aurora for certain compounds developed and
commercialized by Warner-Lambert which were identified using a screen developed
by Aurora.

Under the terms of the Warner-Lambert Agreement, subject to certain conditions,
the UHTSS syndicate is restricted to six members for a limited period.
Warner-Lambert may terminate the agreement at any time without cause upon 45
days written notice to Aurora, provided that certain withdrawal payments are
made. Each party has the right to terminate the agreement upon the material
breach by the other party of its obligations under the agreement.

Merck & Co., Inc. In December 1997, the Company and Merck entered into a
Collaborative Research and License Agreement (the "Merck Agreement") regarding
the development of the Company's UHTSS and the installation of a UHTSS at Merck.
Under the terms of the Merck Agreement, the Company is required to develop and
separately install three components to be integrated into one complete UHTSS. In
return, Merck is obligated to make certain payments to the Company in the form
of non-refundable upfront fees, delivery payments and ongoing co-development
funding. The Company is obligated to provide service and support for the UHTSS
installed at Merck for a limited period. Merck also has certain options for
additional systems and certain system components.

The Company and Merck will also co-develop high throughput screening assays for
use by Merck in exchange for specified fees from Merck. In exchange for certain
additional payments to Aurora, Merck will also have the right to use the
Company's fluorescent assay technologies for internal research and drug
development, including the development of screening assays. Merck will also make
certain milestone and royalty payments to Aurora for certain compounds developed
and commercialized by Merck using a screen developed by Aurora.

Under the terms of the Merck Agreement, subject to certain conditions, the UHTSS
syndicate is restricted to six members for a limited period. Merck may terminate
the agreement at any time without cause upon 90 days written notice to Aurora,
provided that certain withdrawal payments are made. Each party has the right to
terminate the agreement upon the material breach by the other party of its
obligations under the agreement.

Roche Bioscience. In December 1996, the Company and Roche entered into a
Collaborative Research and License Agreement ("Roche Agreement") regarding the
development and delivery of a certain screening instrument by Aurora. Roche made
certain payments to the Company in the form of non-refundable upfront fees and
delivery payments. For a limited period of time specified in the agreement, the
Company provided service and support for any instrument delivered to Roche. The
Company and Roche also co-developed a screening assay for use with a target
identified in the Roche Agreement. In connection with such development, Roche
made certain payments to the Company in the form of non-refundable upfront fees
and ongoing research and co-development funding. Aurora is prohibited, for a
period of time specified in the agreement, from entering into any third-party
collaboration with respect to the specific target set forth in the Roche
Agreement.

Allelix Biopharmaceuticals, Inc. In February 1997, the Company and Allelix
entered into a Collaboration Agreement (the "Allelix Agreement") regarding the
development over a three-year period of screening assays for use with targets
identified by Allelix and agreed to by Aurora. Under the terms of the Allelix
Agreement, the Company is required to develop such screening assays and to
perform screening services, and Allelix is obligated to make certain payments to
the Company in the form of upfront fees, development payments and fees for
screening services. Allelix is also required to make certain milestone and
royalty payments to Aurora with respect to certain compounds identified using a
screen developed by Aurora.


                                       11


<PAGE>   12

UHTSS TECHNOLOGY ALLIANCES

Aurora has entered into strategic technology alliances to design, develop and
implement its UHTSS with leading companies in the areas of instrumentation,
storage and retrieval systems and microfluidics, including the alliances
summarized below.

Packard Instrument Company. In April 1996, the Company entered into a
Collaboration and License Agreement with Packard (the "Packard Agreement")
regarding the joint development of certain components including microfluidics
devices, NanoPlates and fluorescence detectors for use, among other things, in
the UHTSS. Aurora was granted, for a period of two to three years from Aurora's
acceptance of each operational component, an exclusive right to use, market,
lease and sell, for use in certain applications defined in the agreement, such
component. Packard was granted a worldwide, exclusive sublicense under the
Company's license with the University of California Regents to make, have made
and sell certain fluorescent reagents covered by such license to non-profit
organizations for their internal, non-commercial research. In connection with
the execution of the Packard Agreement, Packard made a $1.0 million equity
investment in Aurora. Packard has also provided the Company with research
funding for the development of certain instrumentation.

In February 1998, Packard and the Company amended the agreement to redefine
certain aspects of market exclusivity for piezo-electric microfluidic devices
and fluorescent detection and to transfer responsibility for and manufacture of
NanoPlates to Aurora. The companies also entered into a supply agreement for the
manufacture by Packard of microfluidic devices and fluorescent detectors for
UHTS systems.

Carl Creative Systems, Inc. In November 1996, the Company entered into a
Development Agreement with Carl Creative regarding the development and sale of,
among other things, liquid handling components and robotics for use with the
UHTSS. Certain components provided for in the agreement have been delivered to
Aurora.

Universal Technology, Inc. In December 1996, the Company entered into a
Development Agreement with UTI regarding the development and sale of storage and
retrieval instrumentation for use with the Company's UHTS system. Such storage
and retrieval instrumentation has been incorporated into the storage and
retrieval components of the UHTSS that have been accepted by BMS and Lilly.

PATENTS AND PROPRIETARY RIGHTS

The Company's patent portfolio includes over 50 patent applications filed in the
United States and foreign patent jurisdictions. The Company is either the
assignee or exclusive licensee of these patent rights. The Company is the
exclusive licensee of four issued U.S. patents. Certain aspects of the Company's
technology related to GFP reporters, Beta-lactamase based reporters, protease
reporters, kinase reporters, and membrane voltage reporters are exclusively
licensed from The Regents of the University of California ("The Regents").
Pursuant to the terms of the Exclusive License Agreement between the Company and
The Regents, the Company is obligated to pay expenses associated with patent
prosecution and maintenance, certain license issue fees and royalties to the
Regents. Certain aspects of the Company's technology related to GFP reporters
are exclusively licensed from the University of Oregon ("UO"). Pursuant to the
terms of the License Agreement between the Company and UO, the Company is
obligated to pay to UO expenses associated with patent prosecution and
maintenance, certain annual payments and, upon the issuance of a patent related
to the subject technology, to issue shares of the Company's Common Stock to UO.
Certain aspects of the Company's technology related to G-protein coupled
receptor reporters are exclusively licensed from the California Institute of
Technology ("Cal Tech"). In connection with the execution of the License
Agreement between the Company and Cal Tech, the Company became obligated to pay
certain expenses associated with patent prosecution and maintenance, and the
Company issued shares of its Common Stock to Cal Tech.

Additionally, the Company has obtained a non-exclusive license from SIBIA
Neurosciences, Inc. ("SIBIA"), with limited rights to sublicense, under patent
rights covering certain transcription-based assay technology (which relates to
certain uses of reporter genes) for screening. Pursuant to the terms of the
Non-Exclusive Cross-License Agreement between the Company and SIBIA, the Company
granted SIBIA a non-exclusive license to certain of Aurora's technologies, and
the Company issued to SIBIA shares of the Company's Common Stock. The Company
and SIBIA are also obligated to pay each other certain royalties. The Company is
dependent on the rights licensed 

                                       12


<PAGE>   13
from such parties. Any challenge to, invalidation or loss of such rights could
have a material adverse effect on the business, financial condition and results
of operation of the Company.

EMPLOYEES

As of February 28, 1998, the Company had 102 full-time employees, 31 of whom
hold M.D. or Ph.D. degrees and 17 of whom hold other advanced degrees. Of these
employees, 77 were engaged in research and development activities, with the
remainder engaged in legal, business development, finance and general
administration activities. The Company's future success depends in significant
part upon the continued service of its key scientific, technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. None of the Company's employees is
represented by a labor union or covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:
<TABLE>
<CAPTION>

           NAME                       AGE                 POSITION
           ----                       ---                 --------
<S>                                   <C>  <C>                                          
Timothy J. Rink.....................  51   Chairman of the Board, President and Chief
                                           Executive Officer
J. Gordon Foulkes...................  44   Chief Technical Officer, Director
Paul A. Grayson.....................  33   Senior Vice President, Corporate
                                           Development
John D. Mendlein....................  38   Senior Legal Counsel and Vice President,
                                           Intellectual Property
Deborah J. Tower....................  36   Vice President, Finance and
                                           Administration, Secretary and Treasurer
</TABLE>

Officers serve at the discretion of the Board of Directors. There are no family
relationships between any executive officers of the Company.

Timothy J. Rink has served as Chairman of the Board, President and Chief
Executive Officer of the Company since February 1996. From 1990 through 1995,
Dr. Rink served as President and Chief Technical Officer of Amylin
Pharmaceuticals, Inc., a publicly held biopharmaceutical company. Dr. Rink was
Vice President, Research at SmithKline Beecham in the U.K. from 1984 to 1989,
and previously was Lecturer in Physiology at the University of Cambridge. Dr.
Rink currently serves on the Scientific Advisory Board of Amylin, and he is a
director of CoCensys, Inc. and NPS Pharmaceuticals, Inc., all publicly held
biopharmaceutical companies. Dr. Rink received his M.A., M.D. and Sc.D. in
Medical Sciences from the University of Cambridge, England.

J. Gordon Foulkes has been Chief Technical Officer and a director of the Company
since November 1996. From 1987 to 1996, Dr. Foulkes served in several capacities
at OSI Pharmaceuticals, Inc. ("OSIP"), formerly known as Oncogene Science, Inc.,
where he was a director and most recently held the position of Chief Scientific
Officer. Prior to joining OSIP, Dr. Foulkes led a research group at National
Institute for Medical Research in the U.K., and was previously a post-doctoral
fellow in Dr. David Baltimore's laboratory at the Massachusetts Institute of
Technology. Dr. Foulkes obtained his B.Sc. in Biochemistry at the University
College, Cardiff, U.K. and his Ph.D. in Biochemistry in Professor Philip Cohen's
laboratory at the University of Dundee, Scotland.

Paul A. Grayson joined the Company in April 1996 and currently serves as Senior
Vice President, Corporate Development. From 1994 to 1996, Mr. Grayson served as
Director of Business Development for Advanced Tissue Sciences, Inc. From 1987 to
1994, Mr. Grayson held various research, marketing and business development
positions at Allergan Pharmaceuticals and Gensia Inc. Mr. Grayson received his
B.S. in Biochemistry and Computer Science from the University of California, Los
Angeles, and his M.B.A. from the University of California, Irvine.

John D. Mendlein joined the Company in August 1996 and currently serves as
Senior Legal Counsel and Vice President, Intellectual Property. From 1990 to
1996, Dr. Mendlein worked at Cooley Godward LLP, Palo Alto, California, where he
specialized in intellectual property law. Dr. Mendlein received his Ph.D. in
Physiology from 

                                       13


<PAGE>   14

the University of California, Los Angeles, and his J.D. from the University of
California, Hastings College of Law and his B.S. in Biology from the University
of Miami, Florida.

Deborah J. Tower joined the Company in May 1996 and currently serves as Vice
President, Finance and Administration, Secretary and Treasurer. From 1994 to
1996, Ms. Tower served as Director of Finance and Accounting of Sequana
Therapeutics, Inc. From 1989 to 1993, she served as Controller of Vical Inc. Ms.
Tower received a B.S. in Accounting, with honors, from San Diego State
University and is a Certified Public Accountant.

SCIENTIFIC ADVISORS

The Company's scientific advisors, who have demonstrated expertise in various
fields, advise the Company from time to time concerning long-term scientific
planning, research and development. The scientific advisors also evaluate the
Company's research programs, recommend personnel to the Company, and advise the
Company on specific scientific and technical issues. The scientific advisors are
compensated by retainer and on a time and expenses basis and have received
shares of Common Stock of the Company. The Company has entered into consulting
agreements with a number of the scientific advisors.

The Company does 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 the
Company. Accordingly, such persons are expected to devote only a small portion
of their time to the Company. The Company's scientific advisors are:

Burton G. Christensen, Ph.D. -- former Senior Vice President for Chemistry,
Merck Sharp & Dohme

Tom Curran, Ph.D. -- Chairman, Department of Developmental Neurobiology, St.
Jude's Hospital Medical Center, Memphis; formerly Associate Director, Roche
Institute of Molecular Biology

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

Melvin I. Simon, Ph.D. -- Professor of Biological Sciences and Chairman of the
Biology Division, California Institute of Technology

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

RISK FACTORS

This Form 10-K contains certain statements of a forward-looking nature relating
to future events or the future financial performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this Form 10-K, including the matters set forth below, which could
cause actual results to differ materially from those indicated by such
forward-looking statements.

Limited Operating History; Uncertainty of Future Profitability. The Company was
formed in May 1995, has a limited operating history and is at an early stage of
development. As of December 31, 1997, the Company had an accumulated deficit of
$3.1 million. The Company's expansion of its operations and continued
development of its UHTSS and fluorescent assay technologies will require a
substantial increase in expenditures and the Company 

                                       14


<PAGE>   15

expects to incur operating losses at least through 1998. The Company's ability
to achieve sustained profitability will depend in part on its ability to
successfully develop and install its UHTSS, provide screen development and
screening services to pharmaceutical and biotechnology companies, achieve
acceptable performance specifications for its UHTSS and gain industry acceptance
of its systems, services and technologies. Accordingly, the extent of future
losses and the time required to achieve sustained profitability is uncertain.
The Company is subject to the risks inherent in the operation of a new business,
such as the difficulties and delays often encountered in the development and
production of new, complex technologies. There can be no assurance that the
Company will be able to address these risks. Payments from corporate
collaborators and interest income are expected to be the only sources of revenue
for the foreseeable future. Royalties or other revenues from commercial sales of
products based upon any compound identified by using the Company's technologies
are not expected for at least several years, if at all. The time required to
reach or sustain profitability is uncertain, and there can be no assurance that
the Company will be able to achieve or maintain profitability. Moreover, if
profitability is achieved, the level of such profitability cannot be predicted
and may vary significantly from quarter to quarter.

New and Uncertain Technology. The Company's UHTSS technology and its methods of
screening molecular targets incorporate new and unproven approaches to the
identification of lead compounds with therapeutic potential. The Company intends
to use its UHTSS and fluorescent assay technologies to rapidly identify for
itself and its collaborators as many compounds with commercial potential as
possible. Historically, because of the highly proprietary nature of such
activities, 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
have conducted molecular target screening and lead compound identification
within their own internal research departments. The Company's ability to succeed
will be dependent, in part, upon the willingness of potential collaborators to
use the Company's systems, services and technologies as a tool in the discovery
and development of compounds with commercial potential.

The Company's fluorescent assay technologies are novel for use in the drug
discovery process and have never been utilized in the discovery of any compound
that has been commercialized. The Company has completed the development of only
limited numbers of screens for its collaborators. There can be no assurance that
the Company's fluorescent assay technologies will result in the discovery of
lead compounds that will be safe or efficacious. Furthermore, there can be no
assurance that the Company can consistently develop, validate or reproduce its
biochemical and cell-based assays or reagents or substrates required for their
use in volumes sufficient to fulfill the requirements of its collaborative
agreements or to meet the Company's needs for internal use. Development of new
pharmaceutical products is highly uncertain, and no assurance can be given that
the Company's drug discovery technology will result in any commercially
successful compound.

The Company's UHTSS technology has never been implemented as a fully operational
system. The UHTSS is not expected to be fully integrated and operational for at
least two years. The UHTSS will require significant additional investment and
research and development prior to commencement of full-scale commercial
operation, including integration of complex instrumentation and software and
testing to validate performance and cost effectiveness, and is subject to
substantial risks. 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 difficult 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.
Some of the instrumentation and software expected to comprise the UHTSS are not
now and have not previously been used in commercial applications. Many of these
technologies have not been validated or developed at levels necessary to screen
miniaturized assays, and there can be no assurance that UHTSS technologies, if
developed, will achieve expected performance levels at these scales. The
successful implementation and operation of the UHTSS 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, fluorescence detector
technologies and software and information systems. The liquid dispensing
requirements for the NanoPlates being designed for the UHTSS are far beyond
current high throughput screening practices for dispensing small volumes. The
development of microfluidics to accurately and rapidly aspirate and dispense the
microscopic volumes necessary for the UHTSS is particularly challenging. There
can be no assurance that the Company and its suppliers will be able to
successfully integrate or implement this microfluidics technology or all of the
other instrumentation needed for the UHTSS.

                                       15



<PAGE>   16

As the UHTSS is 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. There can
be no assurance that unforeseen complications will not arise in the development,
delivery and operation of the UHTSS that could materially delay or limit its use
by the Company and its corporate collaborators, substantially increase the
anticipated cost of development of the system, result in the breach by the
Company of its contractual obligations to its collaborators and others, or
render the system unable to perform at the quality and capacity levels required
for success. Such complications or delays could subject the Company to
litigation and have other material adverse effects on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to successfully develop its UHTSS, achieve anticipated
throughputs, gain industry acceptance of the Company's approach to the
identification of lead compounds or develop a sustainable profitable business.

Dependence on Pharmaceutical and Biotechnology Collaborations. The Company's
strategy for the development and commercialization of its integrated technology
platform involves the formation of multiple corporate collaborations. To date,
all revenue received by the Company has been from its collaborations and
technology alliances. The Company expects that substantially all revenue for the
foreseeable future will come from collaborators. Furthermore, the Company's
ability to achieve profitability will be dependent upon the ability of the
Company to enter into additional corporate collaborations for development of
screens and for screening services or its human cell functional genomics
program. Because pharmaceutical and biotechnology companies engaged in drug
discovery activities have historically conducted drug discovery and screening
activities through their own internal research departments, these companies must
be convinced that the Company's UHTSS technologies justify entering into
collaborative agreements with the Company. There can be no assurance that the
Company will be able to negotiate additional collaborative agreements in the
future on acceptable terms, if at all, that such current or future collaborative
agreements will be successful and provide the Company with expected benefits, or
that current or future collaborators will not pursue or develop alternative
technologies either on their own or in collaboration with others, including the
Company's competitors, as a means for identifying lead compounds or targets.

The Company's strategy for the development of the UHTSS includes the
establishment of a syndicate of collaborators to provide the Company with
development funding, technology and personnel resources and system validation.
To date, the Company's UHTSS co-development syndicate includes BMS, Lilly,
Warner-Lambert and Merck. The Company's agreements provide that the agreement
generally may be terminated by the collaborator without cause upon short notice,
which would result in loss of anticipated revenue. In addition, the amount and
timing of resources that current and future collaborators, if any, devote to
collaborations with the Company are not within the control of the Company. There
can be no assurance that such collaborators will perform their obligations as
expected or that the Company will derive any additional revenue from such
agreements. There can be no assurance that any one or more of the Company's
collaborators will not elect to terminate their agreements with the Company.
Termination of the Company's 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 the Company's
business, financial condition and results of operations.

The Company's strategy involves expanding its functional genomics programs and
obtaining access to libraries of compounds from third parties to be screened
against multiple targets. Because of the potential overlap of compounds and
targets provided by the Company's collaborators, there can be no assurance that
conflicts will not arise among collaborators as to rights to particular products
developed as a result of being identified through the use of the Company's
technologies. 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 the
Company's business, financial condition and results of operations.

Dependence on Technology Alliances. In order to further the development of its
UHTSS, the Company has formed and intends to continue to form technology
alliances with certain companies in the areas of informatics, robotics,
automated storage and retrieval, liquid handling systems, microfluidics and
detection devices. The Company relies on these companies, many of which are
single-source vendors, for the development, manufacture and supply of certain
components of the UHTSS. Although the Company believes that alternative sources
for UHTSS components could be made available, any interruption in the
development, manufacture or supply of a sole-sourced component 


                                      16


<PAGE>   17
could have a material adverse effect on the Company's ability to develop its
UHTSS until a new source of supply is qualified, could subject the Company to
penalties for delays in delivery of the UHTSS and, as a result, could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance the Company will be able to
enter into additional technology alliances on commercially reasonable terms, if
at all, or that the Company's current or future technology suppliers will meet
the Company's requirements for quality, quantity or timeliness. Failure of any
one of the Company's current or future technology suppliers to deliver
components (such as microfluidic dispensers or fluorescence detectors) that
meet required specifications in a timely manner, or at all, could significantly
affect the Company's ability to meet its contractual obligations to the UHTSS
syndicate members.

Management of Growth. The Company's success will depend on its ability to expand
and manage its operations and facilities. To be cost-effective and timely in the
development and installation of its systems, services and technologies, the
Company must coordinate the integration of multiple technologies in complex
systems, both internally and for its collaborators. There can be no assurance
that the Company will be able to manage its growth, to meet the staffing
requirements of additional collaborative relationships or to successfully
assimilate and train its new employees. If the Company continues to grow, there
can be no assurance that the management skills and systems currently in place
will be adequate or that the Company will be able to manage any additional
growth effectively. Failure to achieve any of these goals could have a material
adverse effect on the Company's business, financial condition or results of
operations.

Future Capital Needs; Uncertainty of Additional Funding. The Company may be
required to raise additional capital over a period of several years in order to
conduct or expand its operations or acquire new technology. Such capital may be
raised through additional public or private equity financings, borrowings and
other available sources. No assurance can be given that the Company's business
or operations will not change in a manner that would consume available resources
more rapidly than anticipated, or that substantial additional funding will not
be required before the Company can achieve or sustain profitable operations.
There can be no assurance that the Company will continue to receive funding
under its existing collaborative agreements or that the Company's existing or
potential future collaborative agreements will be adequate to fund the Company's
operations.

Dependence on Patents and Proprietary Rights. The Company's success will depend
in part on its ability to obtain patent protection for its systems, services and
technologies, and to operate without infringing the proprietary rights of third
parties. The Company is dependent, in part, on the patent rights licensed from
third parties with respect to its fluorescent assay technologies. There can be
no assurance that patent applications filed by the Company or its licensors will
result in patents being issued, that the claims of such patents will offer
significant protection of the Company's technology, or that any patents issued
to, or licensed by, the Company will not be challenged, narrowed, invalidated,
or circumvented. The Company may also be subject to legal proceedings that
result in the revocation of patent rights previously owned by or licensed to the
Company, as a result of which the Company may be required to obtain licenses
from others to continue to develop, test or commercialize its systems, services
or technologies. There can be no assurance that the Company will be able to
obtain such licenses on acceptable terms, if at all.

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. The patent positions of
pharmaceutical, biotechnology and drug discovery companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. A number of patents have issued and may issue on certain targets or
their use in screening assays that could prevent the Company and its
collaborators from developing screens using such targets, or relate to certain
other aspects of technology utilized or expected to be utilized by the Company.
The Company has received invitations from third parties to license patents owned
or controlled by third parties. The Company evaluates these requests and intends
to obtain licenses that are compatible with its business objectives. There can
be no assurance, however, that the Company will be able to obtain any licenses
on acceptable terms, if at all. The Company's inability to obtain or maintain
patent protection or necessary licenses could have a material adverse effect on
the business, financial condition and results of operations of the Company.

The Company is aware of a third party Patent Cooperation Treaty application that
claims certain uses of green fluorescent protein including its use in protein
kinase assays. If a patent were to issue from such application that relates to
the Company's GFP kinase reporters, the Company believes that such patent would
be unlikely to require the Company to obtain a license. However, the Company may
need to obtain such a license and there can be no assurance that any such
license would be available on commercially reasonable terms, if at all. The
Company is also aware of third party patents and published patent applications
that contain issued or issuable claims that may cover certain aspects of the
Company's or its collaborators' technologies, including certain types of
fluorescent assay 


                                       17


<PAGE>   18

methods, certain assays for ligands to certain classes of targets such as
certain cell surface and intracellular receptors, and certain transcription
based assays for chemicals that modulate transcription of a gene encoding a
protein related to disease. There can be no assurance that the Company would not
be required to take a license under any such patents to practice certain aspects
of its fluorescent assay technologies or that such license would be available on
commercially reasonable terms, if at all. The Company could incur substantial
costs in defending patent infringement claims, obtaining patent licenses,
engaging in interference and opposition proceedings or other challenges to its
patent rights or intellectual property rights made by third parties, or in
bringing such proceedings or enforcing any patent rights against third parties.
The Company's inability to obtain necessary licenses or its involvement in
proceedings concerning patent rights could have a material adverse effect on the
business, financial condition and results of operations of the Company.

In addition to patent protection, Aurora also relies on copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities. In an effort to maintain the confidentiality and ownership of
trade secrets and proprietary information, the Company requires employees,
consultants and certain collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other confidential
information in the event of unauthorized use or disclosure of such information
or that adequate remedies would exist in the event of such unauthorized use or
disclosure. The loss or exposure of trade secrets possessed by the Company could
adversely affect its business.

Competition and the Risk of Obsolescence of Technology. Competition among
pharmaceutical and biotechnology companies that attempt to identify compounds
for development is intense. Because the UHTSS is being designed to integrate a
number of different technologies, the Company competes in many areas, including
assay development, high throughput screening and functional genomics. In the
pharmaceutical industry, the Company competes with the research departments of
pharmaceutical and biotechnology companies and other commercial enterprises, as
well as numerous academic and research institutions. There can be no assurance
that pharmaceutical and biotechnology companies which currently compete with the
Company in specific areas will not merge or enter into joint ventures or other
alliances with one or more other such companies and become substantial
multi-point competitors or that the Company's collaborators will not 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, either alone or pursuant to alliances with others. The Company's
technological approaches, in particular its UHTSS, may be rendered obsolete or
uneconomical by advances in existing technological approaches or the development
of different approaches by one or more of the Company's current or future
competitors. Many of these pharmaceutical and biotechnology companies, which
represent the greatest potential market for the Company's 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.

Uncertainty of Milestone Payments on Pharmaceutical Products. The Company's
long-term revenue will depend in part on the realization of milestone payments
and royalties, if any, triggered by the successful development and
commercialization of lead compounds identified through the use of the Company's
technologies. The Company's screens may result in developed and commercialized
pharmaceutical products generating milestone payments and royalties only after
lengthy and costly pre-clinical and clinical development efforts, the receipt of
requisite regulatory approvals, and the integration of manufacturing
capabilities and successful marketing efforts, all of which must be performed by
the Company's collaborators. With the exception of certain aspects of
pre-clinical development, the Company does not currently intend to perform any
of these activities. The Company's agreements with its collaborators do not
obligate those parties to develop or commercialize lead compounds identified
through the use of the Company's technologies. Development and commercialization
of lead compounds will therefore depend not only on the achievement of research
objectives by the Company and its collaborators, which cannot be assured, but
also on each collaborator's own financial, competitive, marketing and strategic
considerations, all of which are outside the Company's control. There can be no
assurance that the interests and motivations of the Company's collaborators are,
or will remain, aligned with those of the Company, that current or future
collaborators will not pursue alternative technology in preference to that of
the Company or that such collaborators will successfully perform their
development, regulatory, compliance, manufacturing or marketing functions. In
addition, there can be no assurance that any product will be developed and
commercialized as a result of such collaborations, 

                                       18


<PAGE>   19

that any such development or commercialization would be successful or that
disputes will not arise over the application of payment provisions to such
drugs.

Government Regulation. Regulation by the U.S. Food and Drug Administration (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. It is not
currently anticipated that the Company will develop its own drugs through
clinical trials. However, pharmaceutical products, if any, developed by the
Company's collaborators will require lengthy and costly pre-clinical and
clinical trials and regulatory approval by governmental agencies prior to
commercialization. The process of obtaining these approvals and the subsequent
compliance with appropriate federal, state and foreign statutes and regulations
are time consuming and require the expenditure of substantial resources. Delays
in obtaining regulatory approvals would adversely affect the marketing of any
drugs developed by the Company's collaborators, diminish any competitive
advantages that the Company's collaborators may attain and therefore adversely
affect the Company's ability to receive royalties or milestone payments. These
testing and approval processes require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.

Attraction and Retention of Key Employees and Consultants. The Company is highly
dependent on the principal members of its scientific and management staff, and
certain scientific advisors. The loss of key members of its staff could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not maintain "key person" insurance on
any of its employees. The Company's future success will also depend in part on
its ability to identify, recruit and retain additional qualified personnel,
including individuals holding doctoral degrees in the basic sciences. There is
intense competition for such personnel in the areas of the Company's activities,
and there can be no assurance that the Company will be able to continue to
attract and retain personnel with the advanced technical qualifications
necessary for the development of the Company's business. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.

Significant Fluctuations in Quarterly Results. To date, all revenue received by
the Company has been from the payment of license and upfront fees and research
and co-development funding paid pursuant to collaborative agreements. The
Company expects that a significant portion of its revenue for the foreseeable
future will be comprised of such payments. The timing of certain large payments
in the future will depend upon the completion of major deliverables in its
collaborators' UHTS Systems. Operating results may therefore vary substantially
from quarter to quarter and will not necessarily be indicative of results in
subsequent periods.

Possible Volatility of Stock Price. The market prices for securities of
comparable 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. Announcements of technological
innovations or new commercial products by the Company or its competitors,
disputes or other developments concerning proprietary rights, including patents
and litigation matters, publicity regarding actual or potential results with
respect to systems, services or technologies under development by the Company,
its collaborative partners or its competitors, regulatory developments in both
the United States and foreign countries, public concern as to the efficacy of
new technologies, general market conditions, as well as quarterly fluctuations
in the Company's revenues and financial results and other factors, may have a
significant impact on the market price of the Common Stock. In particular, the
realization of any of the risks described in these "Risk Factors" could have a
dramatic and materially adverse impact on such market price.

Control By Management and Existing Stockholders; Anti-Takeover Provisions. The
Company's principal stockholders, executive officers, directors and affiliated
individuals and entities together beneficially own approximately 47% of the
outstanding shares of Common Stock as of March 17, 1998. As a result, these
stockholders, acting together, will be able to influence significantly and
possibly control most matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, mergers, a sale of all or substantially all of the assets of the
Company and other fundamental transactions. In addition, the Company's
Certificate of Incorporation (the "Restated Certificate") does not provide for
cumulative voting with respect to the election of directors. Consequently, the
present directors and executive officers of the Company, together with the
Company's principal stockholders, will be able to control the election of the
members of the Board of Directors of the Company. Such a concentration of
ownership could have an adverse effect 


                                       19


<PAGE>   20

on the price of the Common Stock, and may have the effect of delaying or
preventing a change in control of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.

The Restated Certificate authorizes the Board of Directors of the Company,
without stockholder approval, to issue additional shares of Common Stock and to
fix the rights, preferences and privileges of and issue up to 7,500,000 shares
of preferred stock with voting, conversion, dividend and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of preferred stock, rights to purchase
preferred stock or additional shares of Common Stock may have the effect of
delaying or preventing a change in control of the Company. In addition, the
possible issuance of such preferred stock could make the acquisition of a
substantial block of the Company's Common Stock more difficult or limit the
price that investors might be willing to pay for shares of the Company's Common
Stock. Further, the Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. Special meetings of the stockholders of the Company may be
called only by the Chairman of the Board of Directors, the President of the
Company, by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors, or by the holders of 10%
of the outstanding voting stock of the Company. These and other provisions
contained in the Restated Certificate and the Company's Bylaws, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving an actual or potential change in control of the
Company or its management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices)
and may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their best
interests and, therefore, could adversely affect the price of the Company's
Common Stock.


                                       20
<PAGE>   21



ITEM 2.        PROPERTIES

The Company leases 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. The Company also leases approximately 22,200
square feet of laboratory and office space in La Jolla, California, which is
subleased to third-party tenants. These facilities are leased through October
15, 1999. The Company believes these facilities will be adequate for its current
and projected needs and that additional space at a nearby location will be
available as needed.

ITEM 3.        LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

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

Not Applicable.

                                       21
<PAGE>   22



                                     PART II

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

(a)  The Company's 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 the Company's 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
</TABLE>

     As of March 17, 1998, there were approximately 104 stockholders of record
     of the Company's common stock. The Company has never declared or paid any
     cash dividends on its common stock and does not intend to pay any cash
     dividends on its common stock in the foreseeable future.

(b)  Expenses incurred by the Company through December 31, 1997 in connection
     with the issuance and distribution of Common Stock in its initial public
     offering in June 1997 included underwriting discounts and commissions of
     $2,905,129 and other expenses of $852,460. Total offering expenses of
     $3,757,589 resulted in net offering proceeds to the Company of $37,744,251.
     No expenses were paid to directors, officers or affiliates of the Company
     or 10% owners of any class of equity securities of the Company.

     Of the net offering proceeds to the Company of $37.7 million, through
     December 31, 1997 approximately $9.1 million was used for general corporate
     purposes, approximately $1.7 million was used for enhancement of internal
     research and development capabilities and approximately $1.6 million was
     used for facilities expansion and improvements. No payments were made to
     directors, officers or affiliates of the Company or 10% owners of any class
     of equity securities of the Company, other than compensation payments to
     officers of the Company. Approximately $25.3 million of the net offering
     proceeds remain as working capital, with approximately $8.8 million held as
     cash and cash equivalents and approximately $16.5 million held as temporary
     investments.

                                       22
<PAGE>   23



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>

                                                                               
                                                                               PERIOD FROM
                                                                               MAY 8, 1995
                                             YEARS ENDED DECEMBER 31,         (INCEPTION) TO
                                        ------------------------------------  DECEMBER 31,
                                              1997              1996              1995
                                        ------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:           (in thousands, except per share and share amounts)
<S>                                     <C>               <C>                 <C>         
Revenue:
   Screening systems                    $       8,802     $       2,217       $         --
   Screening services                           3,856                --                 --
   License fees                                 2,250                --                 --
                                        ------------------------------------------------------
      Total revenue                            14,908             2,217                 --
Operating expenses:
   Cost of screening systems                    4,637                --                 --
   Cost of screening services                   2,346                --                 --
   Research and development                     5,406             4,396                366
   Selling, general and administrative          3,679             1,275                 46
                                        ------------------------------------------------------
      Total operating expenses                 16,068             5,671                412
                                        ------------------------------------------------------
Loss from operations                           (1,160)           (3,454)              (412)
Interest income                                 1,793               580                 --
Interest expense                                 (346)              (59)                --
                                        ------------------------------------------------------
Income (loss) before income taxes                 287            (2,933)              (412)
Income taxes                                      (20)               --                 --
                                        ------------------------------------------------------
Net income (loss)                       $         267     $      (2,933)      $       (412)
                                        ======================================================

Basic income (loss) per share           $        0.02        $    (0.35)      $  (5,146.59)
                                        ======================================================
Diluted income (loss) per share         $        0.02        $    (0.35)      $  (5,146.59)
                                        ======================================================

Shares used in computing:
   Basic income (loss) per share           13,561,414         8,346,650                 80
                                        ======================================================
   Diluted income (loss) per share         15,422,755         8,346,650                 80
                                        ======================================================

                                                           DECEMBER 31,
                                        ------------------------------------------------------
                                              1997              1996              1995
                                        ------------------------------------------------------
BALANCE SHEETS DATA:                                       (in thousands)
Cash, cash equivalents and investments  $      48,906     $      13,167       $         11
Total assets                                   63,036            17,515                115
Capital lease obligations, less                 3,422             1,111                 --
current portion
Accumulated deficit                            (3,078)           (3,345)              (412)
Total stockholders' equity                     54,364            15,184               (412)
</TABLE>


                                       23
<PAGE>   24



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

This Form 10-K contains certain statements of a forward-looking nature relating
to future events or the future financial performance of the Company. Such
statements are only predictions and actual events or results may differ
materially. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this Item 7, in "Business - Risk Factors"
and elsewhere in this Form 10-K.

OVERVIEW

Aurora Biosciences Corporation ("Aurora" or the "Company") designs and develops
proprietary drug discovery systems, services and technologies to accelerate and
enhance the discovery of new medicines. From May 8, 1995 (inception) to December
31, 1995, the Company's operating activities related primarily to recruitment of
personnel and raising capital. Operating activities since the beginning of 1996
have focused on the development of an integrated technology platform comprised
of a portfolio of proprietary fluorescent assay technologies and its Ultra-high
Throughput Screening System ("UHTSS") designed to allow assay miniaturization
and to overcome many of the limitations associated with the traditional drug
discovery process.

The Company had an accumulated deficit of $3.1 million as of December 31, 1997.
Although the Company was profitable for the first time in 1997, the Company
expects cost of screening systems to increase substantially and, accordingly,
does not expect to be profitable in 1998. The Company's ability to achieve
profitability will depend in part on its ability to successfully develop its
UHTSS, provide screen development and screening services to pharmaceutical and
biotechnology companies, achieve acceptable performance specifications for the
UHTSS and gain industry acceptance of its systems, services and technologies.
Payments from corporate collaborators and interest income are expected to be the
only sources of revenue for the foreseeable future. Royalties or other revenue
from commercial sales of products developed from any compounds identified by
using the Company's technologies are not expected for at least several years, if
at all. Payments under collaborative agreements will be subject to significant
fluctuation in both timing and amount. Furthermore, the Company will continue to
follow a strategy of investing in new technologies to expand its core drug
discovery capabilities. Accordingly, the Company's results of operations for any
period may not be comparable to the results of operations for any other period.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM MAY 8, 1995 (INCEPTION)
TO DECEMBER 31, 1995

Screening systems revenue totaled $8,802,000 and $2,217,000 in 1997 and 1996,
respectively. There was no screening systems revenue in the period from May 8,
1995 (inception) to December 31, 1995 ("the 1995 Period"). The increase in
screening systems revenue in 1997 resulted primarily from the Company's
collaborative agreements with Warner-Lambert Company ("Warner-Lambert") and
Merck & Co., Inc. ("Merck"), which were executed in 1997, as well as funding and
milestone payments under the Company's collaborative agreements with
Bristol-Myers Squibb Pharmaceutical Research Institute ("BMS") and Eli Lilly and
Company ("Lilly"). Screening systems revenue in 1996 primarily resulted from the
Company's collaborative agreements with BMS and Lilly.

Screening services revenue totaled $3,856,000 in 1997, primarily from the
Company's collaborative agreements with BMS, Lilly, Roche Bioscience Corporation
("Roche") and Allelix Biopharmaceuticals, Inc. ("Allelix"). There was no
screening services revenue in 1996 or the 1995 Period.

License fees revenue in 1997 of $2,250,000 resulted from the Company's
collaborative agreements with BMS, Lilly and Warner-Lambert. There was no
license fees revenue in 1996 or the 1995 Period.

Cost of screening systems totaled $4,637,000 in 1997, and was primarily related
to UHTSS development for BMS and Lilly. Because the Company's collaborative
agreements with BMS and Lilly were not entered into until late 1996, and called
for actual research and development to begin in January 1997, there was no cost
of screening systems recognized in 1996 or in the 1995 Period. All costs
associated with the Company's internal development of its screening systems
technology in 1996 and the 1995 Period are included in research and development
expenses for the applicable period. Cost of screening services totaled
$2,346,000 in 1997, and was primarily related to the 


                                       24

<PAGE>   25

development of screening assays for BMS, Lilly and Allelix, as well as screening
services performed for Allelix. There was no cost of screening services in 1996
or the 1995 Period.

Research and development expenses totaled $5,406,000, $4,396,000 and $366,000 in
1997, 1996 and the 1995 Period, respectively. The period-to-period increases
were primarily attributable to increased research and development personnel,
increased equipment, depreciation and facilities expenses in connection with the
expansion of operations, the purchase of laboratory supplies and payments under
technology development and license agreements related to continued investment in
new technology.

Selling, general and administrative expenses totaled $3,679,000, $1,275,000 and
$46,000 in 1997, 1996 and the 1995 Period, respectively. The period-to-period
increases were primarily attributable to increased management and administrative
personnel, increased depreciation and facilities expenses in connection with the
expansion of operations and legal and professional fees incurred in connection
with the overall scale-up of the Company's operations and business development
efforts.

Net interest income increased to $1,448,000 in 1997 from $521,000 in 1996,
reflecting interest income from increased cash and investment balances resulting
from receipts under collaborative agreements and the Company's initial public
offering in June 1997. Interest income was partially offset by interest expense
incurred on capital lease obligations entered into during the second half of
1996 and all of 1997. The Company did not earn interest income nor incur
interest expense in the 1995 Period.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, Aurora held cash, cash equivalents and investment
securities available-for-sale of $48.9 million and working capital of $48.3
million. The Company has funded its operations to date primarily through the
issuance of equity securities with aggregate net proceeds of $56.8 million,
receipts from corporate collaborations and strategic technology alliances of
$16.3 million, capital equipment lease financing of $5.4 million and interest
income of $2.4 million through December 31, 1997.

The Company has entered into non-cancelable purchase commitments for certain
components which will be used in its screening systems. Such commitments total
approximately $8.4 million in 1998.

To date, all revenue received by the Company has been from collaborations,
interest earned on cash and investment balances and technology alliances. The
Company expects that substantially all revenue for the foreseeable future will
come from collaborators and interest income.

The Company has entered into collaborative agreements with BMS, Lilly,
Warner-Lambert, Merck, Roche and Allelix. The Company's ability to achieve
sustained profitability will be dependent in part upon its ability to enter into
additional corporate collaborations. Although the Company is actively seeking to
enter into additional collaborations, there can be no assurance that the Company
will be able to negotiate additional collaborative agreements on acceptable
terms, if at all, or that such current or future collaborative agreements will
be successful and provide the Company with expected benefits.

The Company may be required to raise additional capital over a period of several
years in order to conduct or expand its operations or acquire new technology.
Such capital may be raised through additional public or private equity
financings, borrowings and other available sources. No assurance can be given
that the Company's business or operations will not change in a manner that would
consume available resources more rapidly than anticipated, or that substantial
additional funding will not be required before the Company can achieve or
sustain profitable operations. There can be no assurance that the Company will
continue to receive funding under its existing collaborative agreements or that
the Company's existing or potential future agreements will be adequate to fund
the Company's operations. If additional funding becomes necessary, there can be
no assurance that additional funds will be available on favorable terms, if at
all. If adequate funds are not available, the Company 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 the Company's business,
financial condition and results of operations.

                                       25



<PAGE>   26

IMPACT OF YEAR 2000

Some older computer programs used by the Company were written using two digits,
rather than four, to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could cause a
system failure or miscalculations causing disruption of the Company's
operations, including a temporary inability to process data or engage in similar
normal business activities.

The Company is completing an assessment of whether it will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 Issue cost is not expected to be material. Resolution of the Company's Year
2000 Issue is expected to be completed no later than December 31, 1998, which is
prior to any anticipated impact on the Company's operating systems. The Company
believes that, with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.

The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's systems are vulnerable
to those third parties' failure to remediate their own Year 2000 Issues. There
can be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted and will not have an adverse effect on the
Company's systems.

The costs of the project and the date on which the Company believes it will
complete the modifications necessary to resolve the Year 2000 Issue are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.


                                       26
<PAGE>   27



ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplemental data of the Company 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.

                                       27
<PAGE>   28



                                    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 the Company's proxy statement to be filed in connection with the
solicitation of proxies for its 1998 Annual Meeting of Stockholders (the "Proxy
Statement"). The required information concerning Executive Officers of the
Company 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.

                                     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,
        1997.

(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.
</TABLE>



                                       28

<PAGE>   29
<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER   DESCRIPTION OF DOCUMENT
       ------   -----------------------
     <S>        <C>                                                       
     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 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**    Collaborative Research and License Agreement dated December 18,
                1997 between the Registrant and Merck & Co., Inc.

     10.29      Negative Covenant Pledge Agreement dated September 29, 1997
                between the Registrant and Lease Management Services
                Incorporated.

     10.30      Collateral Security Agreement dated December 16, 1997 between
                the Registrant and Lease Management Services Incorporated.

     10.31**    Packard Aurora Supply Agreement dated February 5, 1998 between
                the Registrant and Packard Instrument Company, Inc.

     10.32**    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.
</TABLE>

                                       29



<PAGE>   30
<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER   DESCRIPTION OF DOCUMENT
       ------   -----------------------
       <S>      <C>                                             
       10.33#   Amendment dated January 2, 1998, to Employment Agreement between
                the Registrant and J. Gordon Foulkes.

       23.1     Consent of Ernst & Young LLP, Independent Auditors.

       27.1     Financial Data Schedule related to the Financial Statements for
                the fiscal year ended December 31, 1997.

       27.2     Restated Financial Data Schedule related to the Financial
                Statements for the period ended June 30, 1997.

       27.3     Restated Financial Data Schedule related to the Financial
                Statements for the period ended September 30, 1997.
----------

       (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 an exhibit to Registrant's Quarterly Report
               on Form 10-Q for the quarter ended September 30, 1997 (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).
</TABLE>

                                       30
<PAGE>   31
                                   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 27, 1998.

                                            By:  /s/ TIMOTHY J. RINK
                                            ------------------------------------
                                                  Timothy J. Rink
                                                  President and Chief Executive
                                                  Officer

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/ TIMOTHY J. RINK                  Chairman of the Board,      March 27, 1998
----------------------------------------          President and Chief    
      Timothy J. Rink, M.A., M.D., Sc.D                Executive
                                                  Officer (Principal
                                                  Executive Officer)
                                                       

            /s/ DEBORAH J. TOWER                Vice President, Finance     March 27, 1998
----------------------------------------          and Administration
              Deborah J. Tower                 (Principal Financial and
                                                  Accounting Officer)

           /s/ J. GORDON FOULKES                       Director             March 27, 1998
----------------------------------------
           J. Gordon Foulkes, Ph.D.

             /s/ JAMES C. BLAIR                        Director             March 27, 1998
----------------------------------------
            James C. Blair, Ph.D.

           /s/ KEVIN J. KINSELLA                       Director             March 27, 1998
----------------------------------------
              Kevin J. Kinsella

          /s/ HUGH Y. RIENHOFF, JR.                    Director             March 27, 1998
----------------------------------------
         Hugh Y. Rienhoff, Jr., M.D.

             /s/ LUBERT STRYER                         Director             March 27, 1998
----------------------------------------
             Lubert Stryer, M.D.

            /s/ ROY A. WHITFIELD                       Director             March 27, 1998
----------------------------------------
              Roy A. Whitfield

          /s/ TIMOTHY J. WOLLAEGER                     Director             March 27, 1998
----------------------------------------
            Timothy J. Wollaeger
</TABLE>


                                       31

<PAGE>   32
                         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, 1997 and 1996................................... F-3

Statements of Operations  for the years ended  December 31, 1997 and 1996, and
  the period from May 8, 1995 (inception) to December 31, 1995.................... F-4

Statements of Stockholders' Equity for the years ended December 31, 1997
  and 1996, and the period from May 8, 1995 (inception) to December 31,
  1995............................................................................ F-5

Statements of Cash Flows for the years ended December 31, 1997 and 1996,
  and the period from May 8, 1995 (inception) to December 31, 1995................ F-6

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

                                      F-1
<PAGE>   33

                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, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1997 and 1996 and for the period from May 8, 1995 (inception) to December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aurora Biosciences Corporation
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997 and 1996 and for the period from May
8, 1995 (inception) to December 31, 1995, in conformity with generally accepted
accounting principles.



                                                      ERNST & YOUNG LLP

San Diego, California
February 7, 1998


                                      F-2
<PAGE>   34



                         AURORA BIOSCIENCES CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                            ----------------------------
                                                                1997          1996
                                                            ----------------------------
<S>                                                          <C>          <C>         
ASSETS
Current assets:
   Cash and cash equivalents                                 $23,168,690  $  3,914,038
   Investment securities, available-for-sale                  25,737,734     9,252,870
   Accounts receivable under collaborative agreements          3,207,166     1,116,523
   Prepaid expenses                                              563,017       228,029
   Other current assets                                          763,330       169,175
                                                            ----------------------------
      Total current assets                                    53,439,937    14,680,635
Equipment, furniture and leaseholds, net                       6,691,939     1,901,515
Notes receivable from officers and employees                     290,000       200,000
Restricted cash                                                1,311,923             -
Other assets                                                   1,302,033       732,374
                                                            ----------------------------
    Total assets                                             $63,035,832   $17,514,524
                                                            ============================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                         $  1,111,946  $    299,819
   Accrued compensation                                          278,852       319,770
   Other current liabilities                                     227,778             -
   Unearned revenue                                            2,324,001       250,000
   Capital lease obligations, current portion                  1,153,185       350,247
                                                            ----------------------------
      Total current liabilities                                5,095,762     1,219,836

Capital lease obligations, less current portion                3,421,652     1,110,897
Other noncurrent liabilities                                     154,346             -

Commitments

Stockholders' equity:
   Convertible preferred stock, $.001 par value; 
    7,500,000 and 25,000,000 shares authorized and 
    no shares and 9,915,973 shares issued and
    outstanding at December 31, 1997 and 1996, respectively            -         9,916
   Common stock, $.001 par value, 50,000,000 shares
    authorized, 17,032,885 and 2,865,156 shares issued and
    outstanding at December 31, 1997 and 1996, respectively       17,033         2,865
   Additional paid-in capital                                 60,497,472    18,887,790
   Deferred compensation                                      (3,072,560)     (371,573)
   Accumulated deficit                                        (3,077,873)   (3,345,207)
                                                            ----------------------------
    Total stockholders' equity                                54,364,072    15,183,791
                                                            ----------------------------
    Total liabilities and stockholders' equity               $63,035,832   $17,514,524
                                                            ============================
</TABLE>

                              See accompanying notes.

                                      F-3
<PAGE>   35



                         AURORA BIOSCIENCES CORPORATION

                            STATEMENTS OF OPERATIONS

                                                                             
<TABLE>
<CAPTION>
                                                                            PERIOD FROM MAY 8,
                                                                                  1995               
                                             YEARS ENDED DECEMBER 31,        (INCEPTION) TO
                                      --------------------------------------   DECEMBER 31,                     
                                             1997               1996               1995
                                      ---------------------------------------------------------
<S>                                     <C>              <C>                <C>           
 Revenue:
    Screening systems                   $ 8,802,056      $   2,216,523      $            -
    Screening services                    3,855,693                  -                   -
    License fees                          2,250,000                  -                   -
                                      ---------------------------------------------------------
       Total revenue                     14,907,749          2,216,523                   -

 Operating expenses:
    Cost of screening systems             4,636,942                  -                   -
    Cost of screening services            2,345,933                  -                   -
    Research and development              5,405,731          4,395,914             365,548
    Selling, general and
      administrative                      3,679,317          1,275,032              46,179
                                      ---------------------------------------------------------
       Total operating expenses          16,067,923          5,670,946             411,727
                                      ---------------------------------------------------------

 Loss from operations                    (1,160,174)        (3,454,423)           (411,727)

 Interest income                          1,793,691            580,382                   -
 Interest expense                          (346,183)           (59,439)                  -
                                      ---------------------------------------------------------
 Income (loss) before income taxes          287,334         (2,933,480)           (411,727)
 Income taxes                               (20,000)                 -                   -
                                      ---------------------------------------------------------
 Net income (loss)                     $    267,334      $  (2,933,480)         $ (411,727)
                                      =========================================================

Basic income (loss) per share         $        0.02      $       (0.35)         $(5,146.59)
                                      =========================================================
Diluted income (loss) per share       $        0.02      $       (0.35)         $(5,146.59)
                                      =========================================================

Shares used in computing:
  Basic income (loss) per share          13,561,414          8,346,650                  80
                                      =========================================================
  Diluted income (loss) per share        15,422,755          8,346,650                  80
                                      =========================================================
</TABLE>

                             See accompanying notes.


                                       F-4
<PAGE>   36

                         AURORA BIOSCIENCES CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                         
                                CONVERTIBLE PREFERRED                                                                      TOTAL
                                         STOCK               COMMON STOCK        ADDITIONAL                            STOCKHOLDERS'
                               ----------------------   ----------------------    PAID-IN     DEFERRED    ACCUMULATED     EQUITY
                                SHARES       AMOUNT       SHARES       AMOUNT      CAPITAL   COMPENSATION   DEFICIT      (DEFICIT)
                               -----------------------------------------------------------------------------------------------------
<S>                            <C>          <C>         <C>           <C>       <C>          <C>          <C>          <C>
  Issuance of common stock            --    $    --              80   $   --     $     --    $      --    $     --     $        --
  Net loss                            --         --           --          --           --           --       (411,727)     (411,727)
                               -----------------------------------------------------------------------------------------------------
Balance at December 31, 1995          --         --              80       --           --           --       (411,727)     (411,727)
  Issuance of Series A  
    preferred stock, net         7,634,895     7,635          --          --      12,617,058        --          --       12,624,693
  Issuance of Series A
    preferred stock for  
    cancellation of notes
    payable                        556,387       556          --          --         924,441        --          --          924,997
  Issuance of Series B  
    preferred stock, net           666,665       667          --          --       1,494,889        --          --        1,495,556
  Issuance of Series C  
    preferred stock, net           600,000       600          --          --       1,496,800        --          --        1,497,400
  Issuance of Series D  
    preferred stock, net           458,026       458          --          --       2,054,943        --          --        2,055,401
  Issuance of common stock,
    net                               --          --      2,677,076      2,677        90,847        --          --           93,524
  Issuance of common stock
    for acquired technology           --          --        188,000        188        63,312        --          --           63,500
  Deferred compensation
    related to stock and
    stock options                     --          --            --        --         145,500     (373,742)      --         (228,242)
  Amortization of deferred
    compensation                      --          --            --        --           --           2,169       --            2,169
  Net loss                            --          --            --        --           --                  (2,933,480)   (2,933,480)
                               -----------------------------------------------------------------------------------------------------
Balance at December 31, 1996     9,915,973     9,916     2,865,156       2,865    18,887,790     (371,573) (3,345,207)   15,183,791
  Costs incurred in
    connection with issuance
    of Series D preferred
    stock                             --          --            --        --         (37,485)       --          --          (37,485)
  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        --          --       37,909,475
  Deferred compensation
    related to stock and
    stock options                     --          --            --        --       3,741,944   (3,513,702)      --          228,242
  Amortization of deferred
    compensation                      --          --            --        --           --         812,715       --          812,715
  Net income                          --          --            --        --           --           --        267,334       267,334
                               =====================================================================================================
Balance at December 31, 1997          --    $     --     17,032,885   $ 17,033   $60,497,472 $ (3,072,560)$(3,077,873) $ 54,364,072
                               =====================================================================================================
</TABLE>

                             See accompanying notes.


                                      F-5

<PAGE>   37


                         AURORA BIOSCIENCES CORPORATION

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                   PERIOD FROM
                                                                                                   MAY 8, 1995
                                                           YEARS ENDED DECEMBER 31,              (INCEPTION) TO
                                                         ----------------------------              DECEMBER 31, 
                                                               1997                1996                1995
                                                         -----------------------------------------------------
<S>                                                      <C>                 <C>                 <C>          
Operating activities:
 Net income (loss)                                       $    267,334        $ (2,933,480)       $   (411,727)
 Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating
   activities:
   Depreciation and amortization                              964,323             156,861               1,822
   Forgiveness of notes receivable from officers
    and employees                                                --                93,129                --
   Issuance of common stock in exchange for
    acquired technology                                          --                63,500                --
   Amortization of deferred compensation                      812,715               2,169                --
   Changes in operating assets and liabilities:
    Accounts receivable under collaborative 
      agreements                                           (2,090,643)         (1,116,523)               --
    Prepaid expenses and other current assets                (929,143)           (378,871)            (18,333)
    Accounts payable and accrued compensation                 771,209             339,820              51,527
     Other current liabilities                                227,778                --                  --
    Unearned revenue                                        2,074,001             250,000                --
     Other noncurrent liabilities                             154,346                --                  --
                                                         -----------------------------------------------------
Net cash provided by (used in) operating
   activities                                               2,251,920          (3,523,395)           (376,711)
Investing activities:
    Purchases of short-term investments                   (24,459,286)        (12,147,818)               --
    Sales and maturities of short-term investments          7,974,422           2,894,948                --
    Purchases of property and equipment                    (1,951,776)           (458,657)            (10,932)
    Notes receivable from officers and employees              (90,000)           (223,331)            (69,798)
    Restricted cash                                        (1,311,923)               --                  --
  Other assets                                               (569,659)           (725,934)             (6,440)
                                                         -----------------------------------------------------
Net cash used in investing activities                     (20,408,222)        (10,660,792)            (87,170)
Financing activities:
   Issuance of convertible preferred stock, net               (37,485)         17,673,050                --
   Issuance of common stock, net                           38,137,717              93,524                --
   Issuance of notes payable                                     --               449,997             475,000
   Principal payments on capital lease obligations           (689,278)           (129,465)               --
                                                         -----------------------------------------------------
Net cash provided by financing activities                  37,410,954          18,087,106             475,000
                                                         -----------------------------------------------------
Net increase in cash and cash equivalents                  19,254,652           3,902,919              11,119
Cash and cash equivalents at beginning of period            3,914,038              11,119                --
                                                         -----------------------------------------------------
Cash and cash equivalents at end of period               $ 23,168,690        $  3,914,038        $     11,119
                                                         ====================================================

Supplemental disclosure of cash flow information:
  Interest paid                                          $    346,183        $     59,439        $       --
                                                         ====================================================

Supplemental schedule of non-cash investing
  And financing activities:
Property and equipment acquired under
  capital leases                                         $  3,802,971        $  1,590,609        $       --
                                                         ====================================================
Conversion of notes payable to convertible
  preferred stock                                        $       --          $    924,997        $       --
                                                         ====================================================
</TABLE>

                             See accompanying notes.

                                      F-6
<PAGE>   38



                         AURORA BIOSCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

Aurora Biosciences Corporation (the "Company" or "Aurora") was incorporated in
California on May 8, 1995 and subsequently re-incorporated in Delaware on
January 22, 1996. The Company designs and develops proprietary drug discovery
systems, services and technologies to accelerate and enhance the discovery of
new medicines. Aurora is developing an integrated technology platform comprised
of a portfolio of proprietary fluorescent assay technologies and its Ultra-high
Throughput Screening System ("UHTSS") designed to allow assay miniaturization
and to overcome many of the limitations associated with the traditional drug
discovery process.

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 a separate component of
stockholders' equity. 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 should
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.

STOCK OPTIONS

Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the provisions of 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.

REVENUE RECOGNITION

Revenue under collaborative agreements typically consists of non-refundable
upfront fees, ongoing research and co-development payments, and milestone,
royalty and other contingent payments. Revenue from non-refundable upfront fees
is recognized upon signing of the agreement. 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. Revenue from
milestone, royalty and other contingent payments will be recognized as earned.

                                      F-7
<PAGE>   39



                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

Revenue from screen development and screening and other services is recognized
as earned. Advance payments received under any agreements in excess of amounts
earned 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.

INCOME (LOSS) PER SHARE

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which replaced
the calculation of primary and fully diluted income (loss) per share with basic
and diluted income (loss) per share. Unlike primary income (loss) per share,
basic income (loss) per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted income (loss) per share is very similar to
the previously reported fully diluted income (loss) per share. All income (loss)
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the requirements of SFAS 128, the recently effective
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 98 and
certain rules of the SEC for shares of convertible preferred stock that
converted into common stock in connection with the Company's initial public
offering as if the shares were converted into common stock as of the date of
original issuance.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, Segment
Information ("SFAS 131"). Both of these standards are effective for fiscal years
beginning after December 15, 1997. SFAS 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments,
minimum pension accrual, and unrealized gains and losses on investments, shall
be reported, net of their related tax effect, to arrive at comprehensive income.
The Company intends to adopt SFAS 130 in 1998. Operating results of prior
periods will not be restated since the Company's only component of comprehensive
income has been unrealized gains and losses on investments, which were not
significant. Historically, the Company has operated in one business segment;
however, SFAS 131 redefines segments and in the future, the Company may be
required to disclose certain financial information about operating segments,
products, services and geographic areas in which they operate. The Company has
not determined how operating segments will be defined for disclosure purposes or
which segments will meet the quantitative requirements for disclosure. The
adoption of SFAS 131 is not expected to have a material impact on the Company's
future results of operations or financial position.

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.

                                      F-8

<PAGE>   40



2.  CASH EQUIVALENTS AND INVESTMENT SECURITIES

A summary of the estimated fair value of cash equivalents and investment
securities is shown below:
<TABLE>
<CAPTION>

                                                                   DECEMBER 31,
                                                                1997          1996
                                                           ---------------------------
<S>                                                        <C>             <C>        
Money market funds                                         $  8,381,835    $ 3,141,747
U.S. government and agency securities                        18,498,884      3,738,755
U.S. corporate securities                                    22,235,157      5,012,834
Other debt securities                                                 -      1,000,241
                                                           ---------------------------
  Total debt securities                                      49,115,876     12,893,577
Less amounts classified as cash equivalents                 (23,378,142)    (3,640,707)
                                                           ---------------------------
  Total investment securities                              $ 25,737,734    $ 9,252,870
                                                           ===========================
</TABLE>

The estimated fair value of each cash equivalent and investment security
approximates cost and no unrealized gains or losses were reported as of December
31, 1997 or 1996. Realized gains or losses on sales of available-for-sale
securities in 1997 and 1996 were not significant. The estimated fair value of
available-for-sale debt securities as of December 31, 1997 by contractual
maturity is as follows: $39.4 million due within one year and $9.7 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 all shares of the Company's common stock owned by the
individual or by a deed of trust on the individual's principal residence. During
1996, notes totaling $93,129 were forgiven and recorded as research and
development expense. Notes receivable as of December 31, 1997 include an
interest-free $150,000 loan to an officer and director of the Company which is
secured by a deed of trust on the individual's principal residence.

4.  EQUIPMENT, FURNITURE AND LEASEHOLDS

Equipment, furniture and leaseholds consists of the following:
<TABLE>
<CAPTION>

                                                                   DECEMBER 31,
                                                               1997            1996
                                                           ----------------------------
<S>                                                          <C>             <C>       
Scientific equipment                                         $3,358,521      $1,255,749
Office furniture, computers and equipment                     2,242,204         731,423
Leasehold improvements                                        2,197,860          73,026
                                                           ----------------------------
                                                              7,798,585       2,060,198
Less accumulated depreciation and amortization               (1,106,646)       (158,683)
                                                           ----------------------------
                                                             $6,691,939      $1,901,515
                                                           ============================
</TABLE>

The cost of equipment, furniture and leaseholds under capital leases at December
31, 1997 and 1996 was $5,393,580 and $1,590,609, respectively. The accumulated
depreciation and amortization of equipment, furniture and leaseholds under
capital leases at December 31, 1997 and 1996 was $915,155 and $120,550,
respectively.

At December 31, 1997, the Company had approximately $2.6 million available on an
$8 million capital lease line that expires in December 1998.


                                      F-9
<PAGE>   41



                         AURORA BIOSCIENCES CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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 $215,000.
The agreements generally provide for four or five year terms and are cancelable
by either party upon 60 or 90 days written notice. During the years ended
December 31, 1997 and 1996 and the period from May 8, 1995 (inception) through
December 31, 1995, the Company expensed approximately $440,000, $332,000 and
$95,000, respectively, of fees and expense reimbursements related to these
agreements.

TECHNOLOGY AND LICENSE AGREEMENTS

The Company has entered into various strategic technology agreements with third
parties regarding the development of its screening systems. These agreements
contain varying terms and provisions which require the Company to make payments
to the third parties. Pursuant to these agreements, the Company paid
approximately $850,000 and $550,000 in 1997 and 1996, respectively, and is
obligated to pay approximately $8.4 million in 1998.

The Company has also entered into various license agreements with academic
institutions regarding 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
$140,000 and $120,000 in 1997 and 1996, respectively.

LEASES

The Company leases its facilities and certain equipment under operating lease
agreements which expire at various dates through September 2008. The facilities
lease agreements are secured by letters of credit totaling $1.3 million, which
are secured by certificates of deposit. At December 31, 1997, such restricted
cash totaling $1,311,923 was included in noncurrent assets. The letters of
credit will be released over the next three years on a predetermined schedule.
Rent expense totaled approximately $1,205,000 and $462,000 in 1997 and 1996,
respectively.

In November 1997, the Company subleased certain of its facilities to a third
party under an operating lease which expires in October 1999. Total sublease
income in 1997 included in expenses is $79,000. Scheduled aggregate future
sublease income at December 31, 1997 is approximately $1,132,000.

Annual future minimum lease payments for operating and capital leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>

                                                     OPERATING LEASES   CAPITAL LEASES
                                                     ---------------------------------
<S>                                                    <C>                 <C>        
Years ended December 31,
1998                                                   $  2,330,370        $ 1,648,464
1999                                                      2,210,744          1,654,281
2000                                                      1,745,628          1,360,911
2001                                                      1,797,515            622,781
2002                                                      1,852,071            360,538
Thereafter                                               11,771,309                  -
                                                       -------------------------------
Total minimum lease payments                           $ 21,707,637          5,646,975
                                                       ============
Less amounts representing interest                                          (1,072,138)
                                                                           -----------
Present value of capital lease payments                                      4,574,837
Less current portion                                                        (1,153,185)
                                                                           -----------
Capital lease obligations, noncurrent                                      $ 3,421,652
                                                                           ===========
</TABLE>


                                      F-10

<PAGE>   42



                         AURORA BIOSCIENCES CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)



6.  STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

The Company issued shares of Series A, B and C preferred stock at $1.66, $2.25
and $2.50 per share, respectively, pursuant to March 1996 preferred stock
purchase agreements. The Company issued Series D preferred stock at $4.50 per
share pursuant to a December 1996 preferred stock purchase agreement.

In March 1996, the Company issued 556,389 shares of Series A preferred stock in
exchange for the cancellation of promissory notes payable totaling approximately
$925,000.

Convertible preferred stock issued and outstanding at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>

                                            SHARES
                                          ISSUED AND                    PREFERENCE IN
                        AUTHORIZED       OUTSTANDING       PAR VALUE      LIQUIDATION
                     ----------------- ----------------- --------------- ------------
<S>                      <C>                <C>               <C>         <C>        
Series A                 10,500,000         8,191,282         $8,191      $13,618,006
Series B                    833,332           666,665            667        1,499,996
Series C                    800,000           600,000            600        1,500,000
Series D                    572,536           458,026            458        2,061,117
                                       ----------------------------------------------
                                            9,915,973         $9,916      $18,679,119
                                       ==============================================
</TABLE>

In June 1997, as a result of the Company's initial public offering of common
stock, all outstanding shares of convertible preferred stock were automatically
converted into 9,915,973 shares of common stock. In addition, the number of
authorized shares of the Company's preferred stock was decreased from 25,000,000
to 7,500,000 upon the closing of the initial public offering.

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, the unvested shares in the event of termination of employment or
engagement. Shares issued under these agreements generally vest over four years.
At December 31, 1997, 1,104,008 shares of common stock were subject to
repurchase by the Company.

During 1996, the Company issued 188,000 shares of common stock in exchange for
certain licenses and rights. Research and development expense of $63,500 was
recorded related to such issuances, representing the fair value of such shares
as determined by the Board of Directors on the date of grant.

In April 1997, the Company effected a four-for-five reverse split of its
outstanding common stock. All share and per share amounts, including those
relating to preferred stock, in the accompanying financial statements have been
retroactively restated to reflect the reverse stock split.

In June 1997, the Company completed an initial public offering of 4,000,000
shares of common stock at $10.00 per share, with the Company receiving net
proceeds of $36.3 million. In July 1997, the Company sold an additional 150,184
shares of common stock in connection with the partial exercise of an
over-allotment option granted to the underwriters for net proceeds of
approximately $1.4 million.

WARRANTS

In May 1996, the Company issued warrants to purchase 54,320 shares of Series A
preferred stock at $1.66 per share to a leasing company in connection with the
execution of a capital lease agreement. In June 1997, in connection with the
Company's initial public offering of common stock, the warrants were exercised
in a cashless transaction resulting in the issuance of 45,290 shares of common
stock. No warrants are outstanding at December 31, 1997.

                                      F-11
<PAGE>   43
                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.  STOCKHOLDERS' EQUITY (CONTINUED)

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
deemed fair value of the Company's common stock at the date of issuance or
grant. Shares included in the computation of deferred compensation at December
31, 1997 and 1996 include restricted stock issued and stock options granted
since April 1996. Gross deferred compensation at December 31, 1997 and 1996 was
$3,887,444 and $373,742, respectively, and related amortization expense totaled
$812,715 and $2,169 in 1997 and 1996, respectively.

STOCK OPTION AND PURCHASE PLANS

In January 1996, the Company adopted the 1996 Stock Plan (the "Stock Plan"),
under which, as amended, 2,000,000 shares of the Company's common stock were
reserved for future issuance. In November 1997, the Board of Directors approved,
subject to stockholder approval, an increase in the number of shares of common
stock available for issuance under the Stock Plan to 4,000,000 shares. 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 and stock appreciation rights
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 and stock purchase rights generally
vest over four years, with one-fourth of the shares vesting after one year and
the remainder vesting monthly over the next three years. 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 400,000 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, 1997,
11,744 shares of common stock have been issued pursuant to the Purchase Plan.

In December 1997, the Board of Directors committed to grant options to purchase
113,075 shares of common stock to employees of the Company on January 1, 1998.
The shares were priced at $13.13 per share, representing the fair market value
of the Company's common stock at December 31, 1997.

During 1997 and 1996, the Company issued 113,472 and 353,960 shares,
respectively, of restricted common stock under the Stock Plan at prices ranging
from $.09 to $3.00 per share. Of the shares issued during 1997 and 1996, 113,472
and 52,800 shares, respectively, were issued at prices below the deemed fair
value of the Company's common stock on the date of issuance. The weighted
average deemed fair value of these issuances was $3.14 and $2.75 per share,
respectively, and the difference between the deemed fair value of such shares
and the fair value as determined by the Board of Directors has been included in
deferred compensation at December 31, 1997 and 1996.

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 that Statement. The fair value of stock
options was estimated at the

                                      F-12

<PAGE>   44
                         AURORA BIOSCIENCES CORPORATION
                    NOTES TO FINANCIAL STATEMENT (CONTINUED)


6.  STOCKHOLDERS' EQUITY (CONTINUED)

date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1997 and 1996: risk-free interest rates of
5.44% and 6.22%, respectively; no annual dividends; volatility factor of the
expected market price of the Company's common stock price of 60%; and an
expected option life of five years. The weighted-average fair value of stock
options granted during 1997 and 1996 was $3.33 and $0.05, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
highly subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

Shares issued under the Company's Purchase Plan were valued based upon the
difference between the market value of the stock and the 15% discounted 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 $5.19 in 1997.

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 option and stock 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 1997 would have been a net loss of approximately $124,000, or $0.01
per share, based on basic and diluted weighted-average shares outstanding for
1997. The pro forma results for 1996 were not materially different from the
reported results for the year. The pro forma results for 1997 and 1996 are not
likely to be representative of the effects of applying SFAS 123 on the reported
net income or loss in future years as these amounts reflect the expense
associated with less than two years of vesting.

The following table summarizes stock option activity under the Stock and
Directors' Plans and related information through December 31, 1997:
<TABLE>
<CAPTION>

                                                           WEIGHTED-AVERAGE
                                              NUMBER OF      EXERCISE
                                               OPTIONS         PRICE
                                             ------------- --------------
<S>                                          <C>           <C>  
Outstanding at December 31, 1995                       -            -
Granted                                            4,000         $0.09
                                             -------------
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
                                             =============
</TABLE>

At December 31, 1997, 726,588 shares remain available for grant under the Stock
and Directors' Plans.

The following table summarizes information about stock options outstanding under
the Company's Stock and Directors' Plans at December 31, 1997:
<TABLE>
<CAPTION>

                           OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                ------------------------------------------    ----------------------------
                                WEIGHTED-
                                 AVERAGE        WEIGHTED-                       WEIGHTED-     
   RANGE OF                     REMAINING        AVERAGE                         AVERAGE
   EXERCISE      NUMBER OF     CONTRACTUAL     EXERCISE        NUMBER OF       EXERCISE
    PRICES        OPTIONS          LIFE          PRICE           OPTIONS          PRICE
-------------------------------------------------------------------------------------------
<S>              <C>           <C>            <C>              <C>            <C>   
$ 0.09 - $ 5.00     657,720         9.16         $ 1.58           26,549         $ 1.51
$ 9.38 - $15.25     448,700         9.76         $12.24            1,000         $11.38
                =============                                 =============
$ 0.09 - $15.25   1,106,420         9.40         $ 5.90           27,549         $ 1.87
                =============                                 =============
</TABLE>


                                      F-13

<PAGE>   45
                         AURORA BIOSCIENCES CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.  STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

At December 31, 1997, the Company has reserved shares of common stock for future
issuance as follows:
<TABLE>
<CAPTION>

<S>                                                      <C>      
Common stock and stock options under 1996 Stock Plan          1,593,008
Common stock under Employee Stock Purchase Plan                 388,256
Stock options under Directors' Plan                             240,000
Other                                                             4,000
                                                         --------------
                                                              2,225,264
                                                         ==============
</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,
                                                        1997           1996 
                                                 ------------------------------
<S>                                              <C>                <C>         
Federal income taxes (benefit) at 35%             $   101,000        $(1,026,000)
State income tax, net of federal benefit                3,000               --
Tax effect on non-deductible expenses                 301,000             62,000
Benefit of net operating loss carryforwards          (402,000)              --
Alternative minimum taxes                              17,000               --
Increase in valuation allowance and other                --              964,000
                                                  ------------------------------
                                                  $    20,000        $      --
                                                  ==============================
</TABLE>

At December 31, 1997, the Company had federal and California income tax net
operating loss carryforwards of approximately $2,351,000 and $2,374,000,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2011 and 2003, respectively, unless previously utilized. The Company
also had federal and California research tax credit carryforwards of
approximately $311,000 and $234,000, respectively, which will begin to expire in
2010 unless previously utilized. The Company also had California manufactured
investment tax credit carryforwards of $228,000, which will begin to expire in
2005 unless previously utilized.

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.

Significant components of the Company's net deferred tax assets as of December
31, 1997 and 1996 are shown below. A valuation allowance of $1,550,000 and
$1,548,000 at December 31, 1997 and 1996, respectively, have been recognized to
offset the net deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>

                                                               DECEMBER 31,
                                                          1997               1996
                                                      ------------------------------
<S>                                                   <C>                <C>        
Deferred tax assets:
  Net operating loss carryforwards                    $   965,000        $ 1,321,000
  Tax credit carryforwards                                704,000            223,000
  Other                                                   178,000            114,000
                                                      ------------------------------
  Total deferred tax assets                             1,847,000          1,658,000
Deferred tax liability:
  Depreciation                                           (297,000)          (110,000)
                                                      ------------------------------
Net deferred tax assets                                 1,550,000          1,548,000
Valuation allowance for net deferred tax assets        (1,550,000)        (1,548,000)
                                                      ------------------------------
Net deferred taxes                                    $      --          $      --
                                                      ==============================
</TABLE>

                                      F-14

<PAGE>   46
                         AURORA BIOSCIENCES CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)



8.  INCOME (LOSS) PER SHARE

The following table details the computation of basic and diluted income (loss)
per share:
<TABLE>
<CAPTION>

                                                                                  PERIOD FROM
                                                                                  MAY 8, 1995
                                                                                  (INCEPTION)
                                                                                      TO
                                                     YEARS ENDED DECEMBER 31,     DECEMBER 31,
                                                      1997           1996            1995
                                                 ------------------------------------------------
<S>                                              <C>               <C>                <C>         
Numerator:

  Net income (loss)                              $   267,334       $(2,933,480)       $  (411,727)
                                                 ------------------------------------------------

  Numerator for basic and diluted
    income (loss) per share -- income
    available to common stockholders             $   267,334       $(2,933,480)       $  (411,727)
                                                 ================================================

Denominator:

  Weighted average common shares                   8,970,183           759,741                 80

  Effect of assumed conversion of
    convertible preferred stock to
    common stock from the date of issuance         4,591,231         7,586,909               --   
                                                 ------------------------------------------------

  Denominator for basic income (loss)
    per share - adjusted weighted
    average common shares                         13,561,414         8,346,650                 80

  Effect of dilutive securities:
    Nonvested common stock                         1,452,820              --                 --
    Warrants                                          20,970              --                 --
    Common stock options                             387,551              --                 --
                                                 ------------------------------------------------
                                                   1,861,341              --                 --
                                                 ------------------------------------------------
   Denominator for diluted income
     (loss) per share - adjusted
     weighted average shares and
     assumed conversions                          15,422,755         8,346,650                 80
                                                 ================================================

Basic income (loss) per share                    $      0.02       $     (0.35)       $ (5,146.59)
                                                 ================================================

Diluted income (loss) per share                  $      0.02       $     (0.35)       $ (5,146.59)
                                                 ================================================
</TABLE>

For additional disclosures regarding convertible preferred stock, warrants and
common stock options, see Note 6.

Income (loss) per share information as presented on the statements of operations
has been presented because historical income (loss) per share information is not
indicative of the Company's capital structure following its June 1997 initial
public offering. Historical income (loss) per share, without an adjustment for
convertible preferred stock, would have been $0.03 in 1997 (basic) and ($3.86)
in 1996 (basic and diluted).

9.  401(k) RETIREMENT SAVINGS PLAN

In January 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. Company matching contributions, if any, are determined by
the Company at its sole discretion. There have been no Company contributions
under the Plan through December 31, 1997. In November 1997, the Board of
Directors approved the initiation of Company matching contributions effective
January 1998.


                                      F-15

<PAGE>   47
                         AURORA BIOSCIENCES CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)



10.  COLLABORATIVE AGREEMENTS

The Company entered into the following collaborative agreements in 1996 and
1997:

ULTRA-HIGH THROUGHPUT SCREENING SYSTEM AND SCREEN DEVELOPMENT AGREEMENTS

The Company entered into collaborative agreements (the "Agreements") with
Bristol-Myers Squibb Company and Eli Lilly and Company, Inc. in 1996 and
Warner-Lambert Company and Merck & Co., Inc. in 1997 (collectively, the
"Collaborators") regarding the development and installation of the Company's
UHTSS at each of the Collaborators. Under the terms of the Agreements, the
Company is required to develop and separately install three components to be
integrated into one complete UHTSS. 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 for a limited period of time.

The Company and the Collaborators will also co-develop high throughout 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. Certain of
the Agreements provide for penalties, defined at $2,777 per day up to $1 million
per agreement, payable by the Company if it fails to deliver the completed UHTSS
by a specified time, as well as bonuses to the Company (up to $500,000 per
certain agreements) in the event of early delivery of the systems.

SCREENING SERVICES AGREEMENTS

In 1996, the Company entered into collaborative agreements with ArQule, Inc. and
Alanex Corporation to screen compound libraries provided by these companies
against diverse molecular and genetic targets using Aurora's novel fluorescent
assays. Any successful lead compounds identified in the screens may be developed
in a joint research collaboration. The partners would share ownership rights to
any compounds discovered and would share any revenues upon commercialization of
the compounds.

In February 1997, the Company and Allelix Biopharmaceuticals, Inc. ("Allelix")
entered into a collaborative agreement (the "Allelix Agreement") regarding the
development over a three-year period of screening assays for use with targets
identified by Allelix and agreed to by Aurora. Under the terms of the Allelix
Agreement, the Company is required to develop such screening assays and to
perform screening services, and Allelix is obligated to make certain payments to
the Company in the form of upfront fees, development payments and fees for
screening services. Allelix 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.

STRATEGIC TECHNOLOGY ALLIANCES

In 1996, the Company entered into strategic technology alliances with Packard
Instrument Company ("Packard"), Carl Creative Systems and Universal Technology,
Inc. to design, develop and implement certain instrumentation, storage and
retrieval systems and microfluidics. The alliances require the Company to make
certain payments for development work performed by these companies (Note 5).

Pursuant to the agreement with Packard, Aurora receives certain payments for
development work it performs and Packard receives certain sublicense rights. In
addition, Packard purchased $1 million of the Company's Series B preferred stock
in May 1996 in connection with the collaboration. The preferred stock was
automatically converted into common stock as a result of the Company's initial
public offering of common stock in June 1997.


                                      F-16
<PAGE>   48
                         AURORA BIOSCIENCES CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)



11.  RELATED PARTY TRANSACTIONS

During the period from May 8, 1995 (inception) to December 31, 1995 and the year
ended December 31, 1996, one of the Company's founding stockholders and
affiliated venture funds loaned the Company $475,000 and $449,997, respectively.
The notes were converted into 556,387 shares of Series A preferred stock in
March 1996. The general partner of the venture funds which made these loans was
the Company's Chairman of the Board and Acting Chief Executive Officer at the
time of these transactions. This individual and stockholder continues to serve
on the Company's Board of Directors.

                                      F-17