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

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996
                         Commission file number 0-28310

                            SIBIA NEUROSCIENCES, INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                           95-3616229
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

            505 COAST BOULEVARD SOUTH, SUITE 300, LA JOLLA, CA 92037
          (Address of principal executive offices, including zip code)

                                 (619) 452-5892
              (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, $.001 PAR VALUE

     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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
                                      ---  ---

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

     On January 31, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant totaled approximately $39,886,769 based on the
closing stock price as reported by The Nasdaq Stock Market. For purposes of
determining this number, shares of Common Stock held by officers, directors and
stockholders whose ownership exceeded ten percent (10%) of the total shares of
Common Stock outstanding at January 31, 1997 were excluded. Exclusion of such
shares should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled or under control
with the Registrant.

     The number of shares of Common Stock of the Registrant outstanding as of
January 31, 1997 was 9,178,077.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A
in connection with the 1997 Annual Meeting of Stockholders scheduled to be held
June 4, 1997 are incorporated herein by reference into Part III of this Report.
Such proxy statement will be filed with the Commission not later than 120 days
after Registrant's year end. Certain Exhibits filed with the Registrant's
Registration Statement on Form S-1 (Registration No. 333-2586) are incorporated
by reference into Part IV of this Report.
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                                     PART I

ITEM 1. BUSINESS

     EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED ("EXCHANGE ACT") INVOLVING
RISK AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THIS FORM 10-K. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE ABILITY TO DEVELOP SAFE AND
EFFICACIOUS DRUGS, VARIABILITY OF ROYALTY, LICENSE AND OTHER REVENUE, FAILURE TO
SATISFY PERFORMANCE OBLIGATIONS, ABILITY TO ENTER INTO FUTURE COLLABORATION
AGREEMENTS, UNCERTAINTY REGARDING THE COMPANY'S PATENTS AND PROPRIETARY RIGHTS
(INCLUDING THE RISK THAT THE COMPANY MAY BE FORCED TO ENGAGE IN COSTLY
LITIGATION TO PROTECT SUCH PATENT RIGHTS AND THE MATERIAL ADVERSE CONSEQUENCES
TO THE COMPANY IF THERE WERE AN UNFAVORABLE OUTCOME OF ANY SUCH LITIGATION), AS
WELL AS OTHER RISKS AND UNCERTAINTIES DISCUSSED IN THE DESCRIPTION OF THE
COMPANY'S BUSINESS BELOW AND THE SECTIONS ENTITLED "RISK FACTORS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AS WELL AS THOSE DISCUSSED IN ANY DOCUMENT INCORPORATED HEREIN BY
REFERENCE.

OVERVIEW

     SIBIA Neurosciences, Inc. ("SIBIA" or the "Company") is engaged in the
discovery and development of novel, small molecule therapeutics for disorders of
the nervous system based on the Company's unique approach to characterizing the
molecular processes involved in such disorders. SIBIA is focusing its efforts on
discovering and developing compounds for the treatment of Parkinson's disease,
Alzheimer's disease, stroke, depression, head trauma, epilepsy, chronic pain,
schizophrenia and other neurological, psychiatric and neurodegenerative
disorders, many of which have large patient populations and represent critical
unmet medical needs. SIBIA's drug discovery platforms are based on two primary
technologies in which the Company has established a leading scientific and
proprietary position -- human receptor/ion channel subtype technology and human
protease technology. SIBIA holds 14 issued U.S. and two foreign patents and has
three allowed U.S. patents and 56 pending U.S. patent applications relating to
these technologies. The Company's strategy is to utilize its technologies to
discover and develop proprietary nervous system drug candidates and collaborate
with corporate partners for the advanced development and commercialization of
such candidates. SIBIA currently has corporate collaborations with Eli Lilly and
Company ("Lilly"), Novartis AG ("Novartis"), Bristol-Myers Squibb Company
("Bristol-Myers Squibb") and Meiji Seika Kaisha, Ltd. ("Meiji").

     SIBIA believes that its human receptor/ion channel subtype technology will
enable the discovery and development of new classes of drugs for the treatment
of nervous system disorders. The Company's technology permits the targeted
identification of compounds that are selective for specific receptor/ion channel
subtypes. Receptors and ion channels and the neurotransmitters that modulate
them are key components in the communication between neurons, or nerve cells.
Such communication is fundamental to many nervous system functions, including
cognition, memory, sensory perception and motor control. These functions are
mediated by cellular processes dependent on calcium ions, which enter neurons
through specific receptor/ion channels. SIBIA has identified the control of
calcium levels within neurons as a key strategy for potential therapeutic
intervention in many nervous system disorders. Compounds which selectively
modulate cellular calcium levels, such as calcium channel blockers used for the
treatment of cardiovascular diseases, have been developed into effective and
well-tolerated drugs. However, these drugs either have been ineffective or have
significant side effects when evaluated for nervous system disorders, which is
likely due to their lack of selectivity or activity on specific neuronal
subtypes. The Company believes that drugs developed with its technology could be
more effective and have fewer side effects than existing drugs for the treatment
of nervous system disorders.

     SIBIA has established a leading proprietary position in human receptor/ion
channel subtype technology. The Company has made significant scientific and
technological advances by cloning key human neuronal receptor/ion channels,
expressing them in stable cell lines and developing the resulting

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recombinant cell lines into functional assays for drug screening. SIBIA is
currently focusing on three major receptor/ion channel classes involved in
regulating neuronal calcium levels -- nicotinic acetylcholine receptors
("NAChRs"), excitatory amino acid receptors ("EAARs") and voltage-gated calcium
channels ("VGCCs"). SIBIA has discovered, isolated and developed an extensive
library of more than 50 complete genes cloned from human brain tissue coding for
multiple, distinct subtypes of these three receptor/ion channel classes. Most of
these subtypes are multimeric (i.e., molecular complexes of two or more
proteins). By expressing the multiple complex genes necessary to form functional
subtypes, SIBIA has overcome a significant technical challenge which it believes
provides an important competitive advantage. To date, SIBIA has expressed more
than 30 receptor/ion channel subtypes in the NAChR, EAAR and VGCC classes in
stable cell lines which have been shown to be physiologically functional. Each
subtype potentially represents a novel molecular target for developing
therapeutic compounds for nervous system disorders. SIBIA has developed unique
and proprietary functional cell-based assays encompassing these molecular
targets and uses these assays with its proprietary high throughput screening
technology to rapidly identify and select compounds for further development. The
Company believes that the integration of its large proprietary collection of
molecular targets with its proprietary assay and screening technologies provides
a powerful and original drug discovery platform. SIBIA has established strategic
alliances with Novartis in the area of EAAR drug discovery and with Lilly in the
area of VGCC drug discovery.

     Within SIBIA's NAChR program the Company has selected and characterized
SIB-1508Y as a compound for the treatment of Parkinson's disease based on its
receptor subtype selectivity and behavioral profile. In contrast to current
therapies which treat only motor dysfunction, the Company believes that
SIB-1508Y may be effective for the treatment of motor, affective and cognitive
dysfunctions of Parkinson's disease. If proven to be safe and effective,
SIB-1508Y would represent a new therapeutic approach for the treatment of
Parkinson's disease and may be useful as a stand-alone therapeutic agent as well
as in combination with L-dopa, the current standard therapy. In December 1996,
the Company filed an Investigational New Drug application ("IND") with respect
to SIB-1508Y. In February 1997, the Company commenced under its U.S. IND a Phase
I clinical trial with SIB-1508Y. In March 1997, the Company announced a new
corporate partnership with Meiji for the development and commercialization of
SIB-1508Y in Japan and certain other Asian countries, however, SIBIA has
retained rights to manufacture clinical supplies and commercial material. SIBIA
plans to establish additional corporate collaborations for advanced clinical
trials and commercialization of SIB-1508Y for other areas of the world. However,
there can be no assurance that the Company will be able to negotiate
collaborative arrangements in the future on acceptable terms, if at all, or that
SIB-1508Y will be successfully developed and commercialized.

     SIBIA's human protease technology is directed at the discovery and
development of therapeutic compounds for Alzheimer's and other neurodegenerative
diseases. Specifically, the Company's technology focuses on the compounds that
control the degradative proteases which generate amyloid (beta)-protein
("A(beta)"). A(beta) is the neurotoxic fragment of the amyloid precursor protein
("APP") and is generally understood to be the major molecular key to Alzheimer's
disease. A(beta) is found at autopsy in senile plaques and in deposits
surrounding the small blood vessels in brain tissue, both of which are
diagnostic for Alzheimer's disease. SIBIA believes the inhibition of A(beta)
formation may be broadly applicable to early- and late-onset Alzheimer's
disease. SIBIA has established assays which identify the neurotoxic A(beta)
fragment as well as a second critical APP processing fragment, neuroprotective
APP (s(alpha)). SIBIA has identified several series of small molecules which
inhibit A(beta) production and enhance APP(s(alpha)) levels in vitro. These
proprietary compounds currently are being studied in vivo. In August 1995, SIBIA
entered into a four-year collaboration agreement with Bristol-Myers Squibb to
discover and develop compounds that are able to selectively modulate the
processing of APP for the treatment of Alzheimer's disease.

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COMPANY STRATEGY

     The Company's strategy is to utilize its two proprietary drug discovery
platforms -- the human receptor/ion channel subtype technology and the human
protease technology -- to discover novel, small molecule therapeutics for the
treatment of nervous system disorders. Key elements of the Company's strategy
include:

            LEVERAGING ITS LEADERSHIP POSITION IN ITS PROPRIETARY HUMAN
        RECEPTOR/ION CHANNEL SUBTYPE AND HUMAN PROTEASE TECHNOLOGIES TO DISCOVER
        AND DEVELOP SMALL MOLECULE THERAPEUTICS. SIBIA pioneered the development
        of molecular and cellular approaches to drug discovery based on human
        neuronal receptor/ion channels and human proteases and has established a
        leadership position in these areas. SIBIA uses its advanced drug
        discovery technologies, including its proprietary functional assays,
        high throughput screening systems and combinatorial chemistry, to
        identify compounds for preclinical development and provide new
        opportunities for strategic alliances. For example, SIBIA has designed
        and selected SIB-1508Y for development for the treatment of Parkinson's
        disease and commenced Phase I clinical trials.

            UTILIZING ITS BROAD PORTFOLIO OF PROPRIETARY MOLECULAR TARGETS TO
        DEVELOP COMPOUNDS THAT ADDRESS THE COMPLETE SPECTRUM OF NERVOUS SYSTEM
        DISORDERS. To date, SIBIA has identified over 30 human receptor/ion
        channel subtypes and several neuronal proteases as molecular targets and
        has developed corresponding cell-based functional assays for high
        throughput drug screening. SIBIA believes that compounds acting on these
        targets may have application to the treatment of a broad range of
        neurological, psychiatric and neurodegenerative disorders, many of which
        represent critical unmet medical needs. By targeting a broad range of
        disorders having significant market potential, the Company seeks to
        reduce reliance on any single program and increase its potential for
        successful development efforts.

            ESTABLISHING STRATEGIC ALLIANCES TO ADVANCE COMPOUNDS THROUGH
        CLINICAL TRIALS AND COMMERCIALIZATION. The Company focuses on drug
        discovery and development and establishes collaborations with
        pharmaceutical or biotechnology companies for advanced development and
        commercialization of its drug candidates to gain access to its partners'
        development, regulatory and marketing expertise and resources.
        Currently, the Company has strategic alliances with Lilly, Novartis,
        Bristol-Myers Squibb and Meiji.

            EXPANDING ITS DRUG DISCOVERY PLATFORMS TO ENHANCE ITS NERVOUS SYSTEM
        DRUG DISCOVERY CAPABILITIES. The Company continues to expand its
        portfolio of molecular targets through internal research, collaborations
        and, if appropriate, licensing. The Company is acquiring additional
        instrumentation that will increase its high throughput screening
        capacity several fold and has a combinatorial chemistry effort for
        rapidly generating analogs of compounds identified in its high
        throughput screening program.

DRUG DISCOVERY PLATFORMS AND DEVELOPMENT PROGRAMS

     SIBIA's drug discovery platforms are based on two primary technologies in
which SIBIA has established a leading scientific and proprietary position: human
receptor/ion channel subtype technology and human protease technology.

     HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY

     THE ROLE OF CALCIUM IN NERVOUS SYSTEM FUNCTION AND DISEASE

     The human central nervous system is a complex network of interconnected
nerve cells, known as neurons, that are responsible for coordination of
virtually all bodily functions, including movement and sensory perception,
learning, memory and decision making. Neurons receive, conduct and transmit
signals. Communication between neurons is essential to the function of the
central nervous system.

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Dysfunction of neurons and/or communications between neurons can result in
neurological disorders (e.g., epilepsy), psychiatric disorders (e.g.,
schizophrenia and depression) and neurodegenerative disorders (e.g., Alzheimer's
and Parkinson's diseases).

     Communication between neurons occurs through complex electrical and
chemical processes. Neurons communicate with each other and with target cells
through the transmission and reception of molecules known as neurotransmitters.
Nerve impulses in the form of voltage changes cause the release of
neurotransmitters from one neuron, which then activate specific receptors on the
surface of an adjacent neuron or target cell and cause a response in the
receiving cell. Each different neurotransmitter interacts with a specific
corresponding receptor or family of receptors and transmits primary messages
between neurons that control important processes within those neurons. These
processes include the regulation of secondary messenger systems that, in turn,
modulate a wide array of signal transduction pathways involved in neuronal
communication and survival.

     Calcium ions are one of the most important primary and secondary messengers
in the nervous system. Calcium ions enter neurons through ion channels
("receptor/ion channels") which open and close (i.e., are gated) either through
ligand/receptor interactions or voltage changes such as nerve impulses. These
receptor/ion channels regulate many essential functions in neurons, such as the
release of neurotransmitters, electrical activity, activation of enzymes and
transcription of genes.

     Because calcium is central to so many critical neuronal functions, the
Company has identified the control of calcium levels within neurons as a key
strategy for potential therapeutic intervention in many nervous system
disorders, including stroke, epilepsy, pain, Parkinson's disease and Alzheimer's
disease and other dementias. For example, the lack of blood flow and oxygen
deprivation caused by a stroke results in abnormally high concentrations of the
neurotransmitter glutamate, triggering a subsequent influx of excessive calcium
ions through specific receptor/ion channels into neurons. This leads to neuronal
cell death and brain damage. Drugs that block the abnormal release or action of
glutamate and/or the excessive calcium buildup in the neurons could represent
effective stroke therapies. Another example of the role of calcium in nervous
system disorders can be seen in Parkinson's disease. The motor deficits
associated with Parkinson's disease are the result of abnormally reduced levels
of the neurotransmitter dopamine, the release of which is calcium-mediated.
Drugs that activate specific receptor/ion channels to enhance the
calcium-mediated release of dopamine from neurons could ameliorate the motor
dysfunction in Parkinson's disease patients.

     Over approximately the past 20 years, drugs blocking calcium influx through
certain receptor/ion channels have been successfully developed and
commercialized for the treatment of cardiovascular diseases such as angina and
hypertension. However, these existing calcium channel blockers have been either
ineffective or have significant side effects when evaluated for nervous system
disorders. This is likely due to their lack of selectivity or activity on
specific neuronal subtypes, which is typical of compounds identified by
traditional drug discovery approaches. The Company believes that its
technologies will permit the targeted identification of compounds that are
selective for specific receptor/ion channel subtypes, enabling the discovery and
development of new classes of drugs that could be more effective and have fewer
side effects than existing drugs for the treatment of nervous system disorders.

     RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY

     Calcium ions enter neurons primarily through: (i) two receptor classes that
function as ligand-gated ion channels -- NAChRs and EAARs; and (ii) VGCCs. These
three classes are the major receptor/ion channel classes involved in regulating
neuronal calcium. Each class is comprised of numerous structurally, anatomically
and pharmacologically distinct subtypes.

     The large number and diversity of NAChR, EAAR and VGCC subtypes have only
recently been established by gene cloning techniques and were unknown and
virtually unmeasurable by traditional drug discovery approaches. SIBIA has
pioneered the discovery and functional expression of cloned genes

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encoding a number of important human subtypes in these three receptor/ion
channel classes. This has enabled SIBIA to characterize a large number of
previously unrecognized receptor/ion channel subtypes and establish them as
targets for drug discovery. SIBIA has further incorporated these molecular
targets into functional cell-based assays for drug screening. The Company
believes this should enable the development of novel, safe and effective
therapies for nervous system disorders through the identification of compounds
acting only on specific neuronal subtypes to selectively control precise
calcium-mediated neuronal processes.

     SIBIA's human receptor/ion channel subtype technology is based on the
identification and cloning of the genes encoding for NAChRs, EAARs and VGCCs
from human brain tissue, the expression of these genes in mammalian cells to
afford fully functional receptor/ion channels of defined subtype and the use of
these cells in in vitro functional drug screening assays. Each cell line or
assay contains only a single human receptor/ion channel subtype. In contrast to
traditional binding assays, these proprietary assays can quantify the functional
effect of test compounds and such compounds can be identified as acting as
agonists, antagonists or modulators at any functional site, known or unknown, on
a specific receptor/ion channel subtype.

     SIBIA has established a leading proprietary position in drug discovery
based on human receptor/ion channel subtypes. Each of the following scientific
and technological developments by SIBIA was critical in building this position
and has represented a significant advance:

        - SIBIA has determined that most of the functional receptor/ion channel
          subtypes in the three classes it has targeted are multimeric (i.e.,
          molecular complexes of two or more proteins), and are coded for by
          multiple genes of considerable complexity. SIBIA has discovered,
          isolated and developed an extensive library of more than 50 complete
          genes cloned from human brain tissue coding for multiple, distinct
          subtypes of NAChRs, EAARs and VGCCs controlling neuronal calcium
          levels.

        - Because most of the receptor/ion channel subtypes are multimeric, the
          expression of the multiple complex genes necessary to form the
          functional subtypes has been a difficult technical challenge. SIBIA
          believes its expertise in expressing multiple genes provides an
          important competitive advantage. To date, SIBIA has expressed more
          than 30 receptor/ion channel subtypes in the NAChR, EAAR and VGCC
          classes in stable cell lines which have been shown to be
          physiologically functional. Each subtype potentially represents a
          novel molecular target for developing therapeutic compounds for
          nervous system disorders. SIBIA is aggressively continuing this
          program and expects to express a significant number of additional
          subtypes in stable cell lines during 1997.

        - SIBIA has developed unique and proprietary functional cell-based
          assays encompassing these molecular targets and uses these assays with
          its proprietary high throughput screening technology to rapidly
          identify and select compounds for further development. SIBIA's high
          throughput screening technology includes proprietary technology and an
          automated system for the discovery and optimization of drug leads
          which specifically modulate the function of specific receptor/ion
          channel subtypes.

     SIBIA's drug discovery efforts are supported by its patent portfolio, which
includes issued patents relating to all three classes of receptor/ion channels
and functional screening technology. See "Business--Patents and Proprietary
Rights." The Company believes that the integration of its large proprietary
collection of molecular targets with its proprietary assay and screening
technologies provides a powerful and original drug discovery platform. See "Risk
Factors -- New and Uncertain Technology."

     HIGH THROUGHPUT FUNCTIONAL SCREENING TECHNOLOGY

     High throughput functional screening is a key component in SIBIA's drug
discovery program. SIBIA utilizes its human receptor/ion channel subtype
technology with high throughput screening in two modes: first, for the testing
of large compound libraries to discover new, selective and potent series of


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compounds for further drug discovery efforts; and second, for the rapid
characterization and profiling of selected series of compounds in order to
choose lead candidates for further in vitro and in vivo study.

     SIBIA's proprietary high throughput functional cell-based assays are
applicable to all of SIBIA's receptor/ion channel drug discovery programs
-NAChRs, EAARs and VGCCs. SIBIA's proprietary assays are based on the
receptor/ion channel-induced changes in cellular calcium levels. In contrast to
traditional binding assays, these assays also allow for simultaneous analysis of
the selectivity, potency, efficacy and pharmacological nature (e.g., agonist,
antagonist or modulator) of the interaction of test compounds with a specific
receptor/ion channel subtype.

     FLUORESCENCE-BASED ION ASSAY. SIBIA's fluorescence-based ion assay
technology measures changes in intracellular events (e.g., calcium
concentrations) through the use of ion-sensitive fluorescent dyes. SIBIA, in
collaboration with a third party, has developed a 96-well microtiter
plate-imaging fluorimeter to perform functional high throughput screening. The
equipment is fully automated with robotics and analyzes the fluorescent signals
of all 96 wells simultaneously, rather than sequentially in a time-delayed
manner. This equipment incorporates a sophisticated computer control and data
capture system which allows SIBIA to perform more than 5,000 functional
receptor/ion channel assays per day, as compared to less than 100 per day using
traditional methods. SIBIA is in the process of obtaining a second automated
system that the Company believes will increase throughput by several-fold.

     TRANSCRIPTION-BASED ASSAY. SIBIA's proprietary transcription-based assay
technology measures the functional activity of test compounds on cell-surface
proteins using a wide array of specifically responsive promoter-reporter gene
constructs and products. SIBIA believes its proprietary transcription-based
assay technology is broadly applicable to virtually any cell-surface protein,
such as receptors, that control signal transduction processes affecting gene
transcription. See "Business--Patents and Proprietary Rights." In addition, the
Company believes that transcription-based assays have application beyond SIBIA's
current receptor/ion channel subtype targets and should support the expansion of
SIBIA's drug discovery efforts to other human molecular targets involved in
nervous system disorders. Furthermore, the Company believes this technology can
also be applied to the discovery of drug candidates for the treatment of
diseases outside the nervous system area. See "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Rights and Item 3. Legal Proceedings."

     SUBTYPE-SELECTIVE DRUG DEVELOPMENT PROGRAM

     SIBIA is applying its human receptor/ion channel technology and utilizing
its broad portfolio of proprietary molecular targets in efforts to rapidly
discover small molecule therapeutics for nervous system disorders. The Company
believes that small molecule therapeutics may pass from the blood to the brain
or spinal cord through the blood-brain barrier and thereby serve as effective
agents for the treatment of certain nervous system disorders. In addition, small
molecules offer advantages with respect to manufacturing and compound stability.
The Company focuses on the discovery and development of drug candidates and
establishes collaborations with pharmaceutical companies for advanced
development and commercialization of such candidates. The chart below summarizes
SIBIA's current receptor/ion channel drug development programs.


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<TABLE>
<CAPTION>
                                                        DEVELOPMENT              COMMERCIAL
PROGRAM                    THERAPEUTIC AREA             STATUS(1)                RIGHTS(2)
-------                    ----------------             -----------              ----------
<S>                        <C>                          <C>                      <C>
NAChR AGONISTS
SIB-1508Y                  Parkinson's Disease,         Phase I clinical         SIBIA/Meiji (3)
                           Cognitive Disorders          trials

SIB-1553A Series           Alzheimer's Disease          Pre-clinical             SIBIA
                           and other Dementias

NAChR Subtype-             Schizophrenia,               Discovery                SIBIA
Selective Agonists         Attention Deficit
                           Disorders, Chronic
                           Pain, Eating
                           Disorders, Depression

EAAR ANTAGONISTS
SIB-1757 Series            Epilepsy                     Leads identified         Novartis/SIBIA(4)

NMDA, Non-NMDA             Stroke, Epilepsy,            Discovery                Novartis/SIBIA(4)
Ionotropic and             Head Trauma, Pain
Metabotropic
Antagonists

VGCC ANTAGONISTS
VGCC Subtype-              Stroke, Epilepsy,            Discovery                Lilly/SIBIA(5)
Selective Antagonists      Chronic Pain

PROTEASE INHIBITORS
APP Modulators             Alzheimer's Disease          Pre-clinical             BMS/SIBIA
</TABLE>

(1)   "Phase I clinical trials" indicates that SIBIA has made the initial
      introduction of the drug into healthy human subjects. The drug is tested
      for safety (adverse effects), dosage tolerance, metabolism, distribution,
      excretion and pharmacodynamics (clinical pharmacology).

      "Pre-clinical" indicates that SIBIA is conducting pharmacology testing,
      toxicology testing, formulation, process development and/or manufacturing
      scale-up prior to possible submission of an IND.

      "Lead identified" indicates that lead compounds have been discovered that
      meet certain criteria of the Company. Lead compounds may undergo
      structural modification and more extensive evaluation prior to selection
      of candidates for preclinical development.

      "Discovery" activities include initial research related to specific
      molecular targets and assay development for the identification of new lead
      compounds.

(2)   Collaborative partners may participate in the preclinical and clinical
      testing phases of the drug development process and, except as described in
      note 3 for Meiji, generally will assume principal responsibility for
      commercialization.

(3)   Meiji has been granted rights for development and commercialization of the
      Company's proprietary nicotinic acetylcholine receptor agonist, SIB-1508Y,
      as a treatment for Parkinson's disease in Japan and other Asian countries.
      SIBIA will supply SIB-1508Y to Meiji for clinical use and will retain
      rights for the commercial manufacture of SIB-1508Y. See "Business--
      Strategic Alliances."

(4)   Novartis has been granted exclusive worldwide rights to manufacture and
      market products discovered during the term of its agreement with SIBIA in
      the EAAR area and will pay certain milestones, if and when milestones are
      achieved, and royalties, if and when products are commercialized, to
      SIBIA. Upon expiration of the term of the agreement, Novartis has a right
      of first negotiation for a three year period with respect to compounds
      identified by SIBIA. See "Business--Strategic Alliances."

(5)   SIBIA and Lilly each have the right to independently utilize SIBIA's
      receptor/ion channel technology in the VGCC area. Under the recent
      extension of the agreement, Lilly has a right of first negotiation with
      respect to compounds identified by SIBIA for a new VGCC subtype during the
      term of the agreement. Lilly has exclusive, worldwide rights to
      manufacture and market products which it discovers using SIBIA technology
      and will pay certain milestones, if and when milestones are achieved, and
      royalties, if and when products are commercialized, to SIBIA. See
      "Business -- Strategic Alliances."


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     OVERVIEW OF SELECTED NERVOUS SYSTEM DISORDERS

     The Company is seeking to discover and develop receptor/ion channel
subtype-specific compounds that may be used for the treatment of Parkinson's
disease, Alzheimer's disease, stroke, depression, head trauma, epilepsy, chronic
pain, schizophrenia and other neurological, psychiatric and neurodegenerative
disorders, many of which have large patient populations and represent critical
unmet medical needs.

     PARKINSON'S DISEASE. Parkinson's disease is a progressive neurodegenerative
disorder displaying motor symptoms of rigidity, akinesia and tremor and is
frequently accompanied by depression and dementia. It affects an estimated
500,000 people in the United States, with about 100,000 new cases reported each
year. About two-thirds of patients diagnosed with the disease are disabled
within five years of diagnosis. There currently is no cure for Parkinson's
disease and no treatment which stops its degenerative course. Many of the
symptoms of early-stage Parkinson's disease can be treated with various drugs
that mimic the action of dopamine, which is reduced in these patients. Current
therapy is primarily the oral administration of L-dopa, a precursor molecule
that neurons are able to convert into dopamine.

     ALZHEIMER'S DISEASE. Alzheimer's disease is a neurodegenerative disorder
exhibiting symptoms of memory loss, loss of language function, disorientation,
inability to think abstractly, inability to care for oneself, personality
change, emotional instability and behavior problems. Dementia of the Alzheimer's
type currently constitutes a large and growing health problem among the elderly,
and its prevalence is increasing as this segment of the population grows.
Alzheimer's disease accounts for about 70% of all cases of dementia,
representing about four million cases in the United States. Conservative
estimates indicate that by the year 2000, there will be five to eight million
cases of Alzheimer's disease in the United States. At present, there is no
effective therapy that will prevent the onset of Alzheimer's disease or slow or
reverse the degenerative process, and there are only a few products available
for treating symptoms for Alzheimer's dementia.

     STROKE. In the United States, there are about 400,000 to 500,000 strokes
suffered each year, resulting in approximately 150,000 fatalities. This makes
stroke the third-leading cause of death in the United States. Almost two-thirds
of the survivors of strokes are handicapped, with more than two million people
in the United States now living with disabilities caused by stroke. Current
therapies for stroke have limited ability to reduce the neuronal cell damage
that results. Presently no effective means exist for treating or reducing the
areas of the brain damaged by stroke.

     HEAD TRAUMA. About one million people in the United States suffer from the
effects of head injuries, and more than 400,000 hospital admissions each year
are attributed to such injuries. The economic cost of head trauma is high
because of the costs of long-term rehabilitation, support services and lost
income.

     EPILEPSY. Over two million people in the United States suffer from epilepsy
with approximately 100,000 new cases reported each year. At present, there is no
cure for this disorder, and no broad-spectrum anti-epileptic is currently
available. Existing symptomatic therapies produce significant adverse effects
and are ineffective for approximately 15% of the epilepsy patient population.

     CHRONIC PAIN. Pain is a complex response and is classified into two broad
categories: acute and chronic. If acute pain problems are not effectively
treated, they may progress to chronic states. Chronic pain is recognized as
being the most frequent cause of disability in the United States and many
industrialized nations. Incidence of pain in the United States exceeds 97
million cases. Major causes of chronic pain include arthritis, cancer pain, back
injuries and migraine, with such causes affecting almost 60 million people in
the United States.

     SCHIZOPHRENIA. Schizophrenia is a group of serious mental disorders that
can be classed, in terms of symptoms, into four major stereotypes: paranoid,
catatonic, disorganized and undifferentiated. The patient often appears to be
mentally impaired, manifesting behavior that is bizarre and inappropriate.
About one percent of the world's population is affected by schizophrenia and it
is estimated that about two million people in the United States suffer from the
disease.



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<PAGE>   10
     NAChR PROGRAM

     The NAChR system is a major excitatory neurotransmitter system comprised of
many different receptor subtypes, each activated by the neurotransmitter
acetylcholine. Mapping and pharmacological studies have revealed that NAChR
subtypes are widely but discretely distributed in the brain and appear to be
associated with specific neuronal structures and functions. SIBIA focuses
certain of its drug discovery and development efforts on NAChR subtypes as drug
targets.

     There is strong evidence that receptors within the NAChR system are
important in Parkinson's disease, Alzheimer's disease and other nervous system
disorders. In particular, a deficit of such receptors has been demonstrated in
Alzheimer's disease and Parkinson's disease patients. Studies by the Company
indicate that specific NAChR subtypes modulate the release of both dopamine and
acetylcholine, each an important neurotransmitter, in specific and different
brain regions. The Company believes that it is possible to develop
subtype-specific NAChR drugs to ameliorate the effects of reduced concentrations
of dopamine in Parkinson's patients and acetylcholine in Alzheimer's patients.

     The Company has selected and characterized SIB-1508Y as a compound for the
treatment of Parkinson's disease based on its receptor subtype selectivity and
behavioral profile. In contrast to current therapies which treat only motor
dysfunction, the Company believes SIB-1508Y may be effective for the treatment
of motor, affective and cognitive dysfunctions of Parkinson's disease. SIB-1508Y
exhibits subtype-selective NAChR agonist activity, releases dopamine,
acetylcholine and norepinephrine from selected brain regions and shows activity
in rodent and primate models of Parkinson's disease and in rodent models of
depression and cognitive function. Preclinical data to date suggests that, if
proven to be safe and effective, SIB-1508Y may be useful as a stand-alone
therapeutic agent, as well as in combination with L-dopa. In December 1996, the
Company filed an Investigational New Drug application ("IND") with respect to
SIB-1508Y. In February 1997, the Company commenced under its U.S. IND a Phase I
clinical trial with SIB-1508Y. In March 1997, the Company announced a new
corporate partnership with Meiji for the development and commercialization of
SIB-1508Y in Japan and certain other Asian countries. SIBIA plans to establish
additional corporate collaborations for advanced clinical trials and
commercialization of SIB-1508Y for other areas of the world. See "Risk Factors
-- Absence of Developed Products; Early Stage of Development" and "-- Dependence
on Collaborative Relationships."

     SIBIA also is seeking to develop NAChR subtype-selective compounds for
other nervous system disorders. In particular, it has identified the SIB-1553A
series of compounds. The Company's studies indicate that these compounds
potentially stimulate acetylcholine release in specific brain regions. SIBIA
believes these types of compounds may have application in the symptomatic
treatment of Alzheimer's disease and other dementias. Furthermore, SIBIA
believes that other subtype-specific NAChR compounds may be useful for the
treatment of other nervous system disorders such as schizophrenia, attention
deficit disorder, chronic pain and eating disorders. The Company expects to
select the preferred clinical compound in the SIB-1553A series by mid-1997.

     EAAR PROGRAM

     EAARs are divided into three categories: NMDA-type receptor/ion channels,
non-NMDA-type receptor/ion channels and metabotropic receptors, a category of G
protein-coupled receptors which do not directly flux calcium but rather function
via other cellular messenger molecules. Each category is comprised of multiple
subtypes that are activated by excitatory amino acid neurotransmitters such as
glutamate and which have unique anatomical distributions.

     The NMDA-type and non-NMDA-type receptor/ion channel categories belong to
the class of ligand-gated ion channels, and a significant number of the
receptor/ion channel subtypes in these categories directly flux calcium into
neurons. These receptor/ion channel subtypes are important for diverse brain
functions, including memory and learning and are also implicated in
neurodegenerative processes. For


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<PAGE>   11
example, the scientific community generally agrees that glutamate is released by
nerve cells subjected to ischemic conditions, as occurs during and after a
stroke. Normally, excess glutamate is removed by nearby cells, but cells
subjected to ischemia do not function properly and are unable to dispose of this
excess glutamate. This excess glutamate binds to EAARs on adjacent nerve cells,
leading to the influx of excess calcium and subsequent cell damage or cell
death. The newly injured nerve cells release more glutamate, and the process
repeats itself, spreading neuronal damage from cell to cell. For this reason,
there is significant interest in developing subtype-selective EAAR antagonists
as a potential treatment for stroke. The Company believes compounds that
modulate EAARs would selectively control calcium entry into nerve cells.

     Metabotropic receptors have been less well-studied but also appear to be
involved in certain nervous system disorders. Clones for genes encoding a number
of different and novel metabotropic EAARs have been isolated by SIBIA from human
brain tissue and have been demonstrated to be functional in several types of
assays. Stable cell lines containing certain of such receptors have been
prepared and are being used in SIBIA's functional high throughput screening
assays.

     The Company believes drugs acting at specific EAAR subtypes may have
application to various nervous system disorders, including stroke, epilepsy and
head trauma and certain neurodegenerative diseases such as Alzheimer's,
Parkinson's and Huntington's diseases. To date, developing therapeutically
useful EAAR drugs has been difficult. Traditional drug discovery approaches have
produced molecules with non-specific EAAR antagonist activity which generally
produce many side effects. SIBIA has discovered a number of different EAAR
subtypes, each with different pharmacological properties. By identifying
receptor subtype-specific EAAR antagonists, the Company believes it may be
possible to effectively treat certain nervous system disorders without the side
effects caused by non-selectively blocking multiple EAAR subtypes.

     The first EAAR gene was cloned at The Salk Institute, and SIBIA has an
exclusive license to the patents relating to this research. SIBIA has
established a corporate collaboration with Novartis in the area of EAAR
subtypes. SIBIA and Novartis are screening compounds from the Novartis library
in functional EAAR subtype assays. In addition, SIBIA has identified the
SIB-1757 series of subtype-specific human metabotropic receptor antagonists.
Under the terms of their collaborative agreement, SIBIA and Novartis will work
together to design and optimize compounds based on this series, and such
compounds would then be further developed by Novartis. Based on preliminary
studies, SIBIA believes that subtype-specific metabotropic receptor antagonists
may provide a novel approach to the treatment of epilepsy. See "Business --
Strategic Alliances."

     VGCC PROGRAM

     The VGCC system is a major receptor/ion channel system involved in
regulating neuronal calcium flux and excitability. VGCCs have traditionally been
classified as L-, T-, N- and P-type calcium channels based on their biophysical
and pharmacological properties. SIBIA's pioneering research in the
characterization of VGCCs by molecular structure has led to the identification
of other classes of calcium channels as well as channel subtypes within these
classes, resulting in a new classification scheme. The critical role of VGCC
subtypes in the function and potential dysfunction of nerve cells indicates that
they may be targets for therapeutic intervention in a number of nervous system
disorders.

     Calcium flux through distinct VGCC subtypes at presynaptic neuron terminals
controls the release of different neurotransmitters, including dopamine,
acetylcholine, serotonin and glutamate. The Company believes that the ability to
selectively control neurotransmitter release with subtype-selective VGCC drugs
could impact many nervous system disorders as follows: (i) control of dopamine
release may have application in the treatment of Parkinson's disease,
schizophrenia and manic-depressive disorders; (ii) control of acetylcholine
release may have application in Alzheimer's disease; (iii) control of serotonin
release may have application in the treatment of migraine and depression; and
(iv) control of glutamate release may have application in the treatment of
stroke, epilepsy and pain. Furthermore, the Company believes modulation of
synaptic activity by controlling neurotransmitter release with VGCC subtype-

                                       11
<PAGE>   12
selective drugs may prove to be a more effective approach with broader
applicability than current drug therapy for nervous system disorders. SIBIA was
the first to clone and functionally express a human neuronal N-type VGCC, and
the Company has filed patent applications on this and subsequent discoveries.

     The early focus of SIBIA's collaboration with Lilly involved the subtypes
of neuronal N-type VGCCs. In May 1995, the Lilly collaboration was expanded to
include additional VGCC subtypes. In January 1997, the Company extended its
research and licensing agreement with Lilly for a second time. The new
agreement, as extended, provides funding for identification and characterization
of a new VGCC subtype not previously covered under the agreement. SIBIA has
generated stable mammalian cell lines which express functional VGCC subtypes and
has developed these cell lines into assays that currently are being employed by
both Lilly and SIBIA in efforts to discover selective drugs using high
throughput screening technology. Under the terms of the collaborative agreement,
Lilly and SIBIA will each seek to optimize and develop lead compounds discovered
from its own screening efforts. See "Business -- Strategic Alliances."

     HUMAN PROTEASE TECHNOLOGY

     SIBIA has developed technology concerning the role of degradative proteases
in neurodegenerative diseases and methods for controlling the activity of these
proteases. Neuronal protease activity leading to degenerative processes is most
notable during progressive diseases such as Alzheimer's disease and in phases of
neuronal cell death which accompany acute situations such as stroke and head
trauma. These proteases are generally believed to break down the neuronal
cytoskeleton leading to nerve cell death and play a fundamental role in the
degeneration of the nervous system. The Company believes that modulating the
activity of these proteases may have a therapeutic benefit by reducing neuronal
cell loss.

     INHIBITORS OF THE FORMATION OF AMYLOID-PROTEIN

     SIBIA's major effort within its human protease technology is currently
focused on controlling degradative proteases which generate A(beta), the
neurotoxic fragment of APP. A(beta), which is derived from APP by the actions of
specific proteases known as the (beta)- and (gamma)-secretases, respectively, is
generally understood to be the major molecular key to Alzheimer's disease.
A(beta) is found at autopsy in senile plaques and in deposits surrounding the
small blood vessels in brain tissue, both of which are diagnostic for
Alzheimer's disease. A number of studies indicate that mutations in the APP gene
are associated with early-onset familial Alzheimer's disease. The clinical
presentation and histopathology of early-onset Alzheimer's disease is
indistinguishable from that seen in the more prevalent late-onset Alzheimer's
disease. The Company therefore believes the inhibition of A(beta) formation may
be broadly applicable to early-and late-onset Alzheimer's disease.

     SIBIA has conducted extensive research concerning the role of APP in
Alzheimer's disease. It has developed technology related to the metabolism of
APP in Alzheimer's disease and methods for controlling the formation of A(beta).
The other important APP metabolic product, secreted APP(s(alpha)), has been
shown in in vitro and in vivo studies to have neuroprotective properties and has
been shown by SIBIA to be significantly decreased in the cerebrospinal fluid of
Alzheimer's disease patients. SIBIA is seeking to develop compounds which
selectively modulate the enzymatic processing of APP, such that the formation of
A(beta) is inhibited and that of APP(s(alpha)) is enhanced, which SIBIA believes
could slow disease progression or possibly modify the underlying disease
process. The Company believes that, to date, research in other laboratories has
focused on either inhibiting the formation of A(beta) or enhancing the formation
of APP(s(alpha)), rather than modifying both processes simultaneously.


                                       12
<PAGE>   13
     OTHER APPLICATIONS

     The Company believes that the protease inhibitor technology developed as
part of the A(beta) inhibitor program has applicability to other broad families
of proteases which are believed to play key roles in the neuronal cell death
that accompanies a variety of neurodegenerative disorders. SIBIA has established
screening assays which measure the ability of selected compounds to enhance,
modulate or inhibit the activity of some of these enzymes in vitro. Furthermore,
SIBIA is establishing neuronal cell-based assays for monitoring the effects of
selected protease inhibitors on apoptosis (programmed cell death). See "Business
-- Research Collaborations and Licenses."

     HUMAN PROTEASE DRUG DEVELOPMENT PROGRAM

     SIBIA has built an integrated drug discovery program for A(beta) protein
technology incorporating molecular biology, cell biology, biochemistry,
pharmacology, combinatorial chemistry and medicinal chemistry. SIBIA has
developed neuronal-type cell lines able to process human APP and produce
APP(s(alpha)) and A(beta), which are used as functional assays for compound
screening and drug development. Some cell lines express APP genes which contain
the mutations that give rise to familial Alzheimer's disease mentioned above.
A(beta), APP(s(alpha)) and other processing fragments can be detected with the
use of various antibodies, and assays for these and other fragments have been
developed as part of SIBIA's drug discovery program. SIBIA's sophisticated
biochemical assays allow quantification of A(beta) and APP(s(alpha)) in
biological fluids derived from cultured cells, animals (normal and transgenic
mice) and sporadic and familial Alzheimer's patients. The Company believes the
assays, and the ability to biochemically evaluate the effect of test compounds
on APP processing in biological systems, and potentially in patients in clinical
trials, provide it a significant competitive advantage.

     SIBIA has identified several series of small molecules which inhibit
A(beta) production in vitro. The assay technology, together with several lead
compounds formed the basis for the SIBIA/Bristol-Myers Squibb collaboration. See
"Business -- Strategic Alliances." The most advanced inhibitors are now being
evaluated in a battery of functional assays, including assays which test the
ability of drug candidates to block A(beta) production in transgenic mice which
are able to process human APP to A(beta).

STRATEGIC ALLIANCES

     Strategic alliances with major pharmaceutical and biotechnology companies
are an integral part of SIBIA's business strategy. To date, SIBIA has
established collaborative agreements with Lilly, Novartis, Bristol-Myers Squibb
and Meiji. There can be no assurance that the Company will maintain its existing
collaborative arrangements or establish any additional collaborative
arrangements or that such future relationships, if established, or its current
relationships will result in marketable pharmaceutical products. See "Risk
Factors -- Dependence on Collaborative Relationships."

     ELI LILLY AND COMPANY

     In May 1992, SIBIA entered into a collaborative agreement with Lilly under
which Lilly agreed to fund research for three years to develop and utilize
SIBIA's receptor/ion channel technology in the area of neuronal VGCCs for the
discovery of drugs that interact with such molecular targets. Coincident with
the original collaborative agreement, Lilly made a $4,000,000 equity investment
in SIBIA. In May 1995, the scope of this collaborative agreement was expanded to
include additional neuronal VGCC subtypes and to increase the Lilly milestone
payment obligations to SIBIA, and the term of the collaboration agreement was
extended for an additional two years. In January 1997, the agreement was again
revised and extended to October 31, 1998.

     Under the Lilly agreement as currently in effect, Lilly will provide
research funding for the identification and characterization of a VGCC subtype
which was not previously covered under the agreement for use in the discovery of
drugs for nervous system disorders. In exchange for providing a

                                       13
<PAGE>   14
certain level of research under the agreement, the Company will receive payments
from Lilly; additional payments may be received by the Company upon the
achievement of certain development milestones and the Company may receive
royalties in the event there are sales of products containing a compound
developed under the agreement. The Company has granted Lilly an exclusive
(except as to SIBIA) license to use certain proprietary VGCC technology of the
Company during the term of the agreement, which license becomes non-exclusive
upon termination of the agreement. Either party may terminate the agreement upon
three months advance written notice provided anytime after August 1, 1997. The
Company recognized contract revenue related to this agreement of $1,621,000,
$1,663,000, and $1,609,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.

      NOVARTIS

     In October 1992, SIBIA entered into a three-year collaborative agreement
(which included research funding and a $5,000,000 equity investment) with
Novartis to develop and utilize SIBIA's receptor/ion channel technology in the
area of EAARs for the discovery of drugs that interact with such molecular
targets. In March 1996, the initial term of the Novartis agreement was extended
through September 1998. Under the agreement, Novartis has been granted exclusive
worldwide rights to manufacture and market products it or SIBIA discovers using
the program technology during the collaboration, and SIBIA is entitled to
receive milestone payments at certain stages of the development of product
candidates, if any are identified, and royalties on sales of products that are
developed, if any are ever developed. During the term of the collaboration
agreement, SIBIA will work exclusively with Novartis in the area of EAARs, and
Novartis has an exclusive license during the term of the collaboration agreement
to use certain of SIBIA's receptor assay technology for EAARs. Upon expiration
of the collaboration agreement, SIBIA retains the rights to use the program
technology for its own drug discovery efforts and may screen molecules from
other sources against EAARs and pursue development of these molecules, subject
to Novartis' right of first negotiation with respect to such molecules
discovered during the three years following expiration of the collaboration
agreement. The collaboration agreement may be terminated by either party upon
six months' prior written notice, which may be provided at any time beginning
September 1997.

     Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to fund
certain capital expenditures (which may be credited against future milestone
payments) and agreed to purchase $7,500,000 of the Company's Common Stock,
$5,000,000 of which was made in conjunction with the initial public offering of
the Company's Common Stock and the remaining $2,500,000 will be made upon the
achievement of certain research milestones.

     BRISTOL-MYERS SQUIBB COMPANY

     In August 1995, SIBIA entered into a collaborative agreement with
Bristol-Myers Squibb under which Bristol-Myers Squibb agreed to fund research
for a minimum of four years to discover and develop compounds able to
selectively modulate the processing of APP for the treatment of Alzheimer's
disease and related neurodegenerative disorders. During the joint research
effort, neither SIBIA nor Bristol-Myers Squibb may enter into any other
third-party agreements directed toward the discovery and development of products
for use in the area of APP metabolism. In addition, Bristol-Myers Squibb has the
sole discretion to determine which compounds, if any, it will pursue to develop.
Under the terms of the agreement, all preclinical and clinical development of
lead compounds will be undertaken by Bristol-Myers Squibb. SIBIA has a right of
first negotiation to obtain a license to certain compounds discovered during the
collaboration in the event Bristol-Myers Squibb elects not to pursue the
development of such compounds. Pursuant to the collaborative agreement, except
with regard to SIBIA's assay technology, SIBIA has granted to Bristol-Myers
Squibb an exclusive, worldwide, royalty-bearing license to commercialize
products arising out of the collaboration. Furthermore, upon the termination of
the collaboration, SIBIA and Bristol-Myers Squibb have granted to one another
non-exclusive licenses to the other's assay technology for the discovery and
development of new compounds. The agreement may not

                                       14
<PAGE>   15
be terminated prior to August 1999 without the parties' mutual consent.

     Coincident with the collaborative agreement, Bristol-Myers Squibb made an
equity investment in the amount of $7,000,000 and paid a license fee of
$3,000,000. Bristol-Myers Squibb is also obligated to make a further equity
investment of $6,000,000 upon the initiation of clinical trials relating to any
product developed from the collaboration. In addition to research funding, SIBIA
is entitled to receive certain milestone payments at certain stages during the
development of product candidates, if any are identified. The agreement also
provides that Bristol-Myers Squibb will pay SIBIA royalties on net sales of
products resulting from the joint research, if any are ever developed.

     MEIJI SEIKA KAISHA, LTD.

     In February 1997, the Company entered into a development and license
agreement with Meiji for the development and commercialization of the Company's
proprietary NAChR agonist, SIB-1508Y, as a treatment for Parkinson's disease in
Japan and other Asian countries. Under the agreement, the Company received an
upfront technology access fee of $3,000,000 (the "Access Fee"), and may receive
development milestone payments and royalties on future product sales, if any.
Under the terms of the agreement, additional pre-clinical tests will be
performed to determine the potential of SIB-1508Y for use in the manner
contemplated by the agreement. In the event such tests do not yield acceptable
results, Meiji may terminate the agreement and the Company will be obligated to
return to Meiji substantially all of the Access Fee. In addition, the Company
may, at its discretion, terminate the agreement if, by June 28, 1997, certain
tasks or development milestones are not achieved by Meiji in which instance the
Company will be permitted to retain part of the Access Fee. SIBIA has retained
rights to develop and commercialize SIB-1508Y outside of Japan and certain other
Asian countries, and has retained rights to manufacture clinical supplies and
commercial material.

RESEARCH COLLABORATIONS AND LICENSES

     Corporate collaborations and research collaborations with academic groups
are an integral part of SIBIA's strategy. Selected collaborations are described
below.

     THE SALK INSTITUTE FOR BIOLOGICAL STUDIES

     In 1988, SIBIA entered into a license agreement with The Salk Institute on
a number of NAChR subunit clones on which two U.S. patents have issued. This
agreement was amended in March 1996 such that the license to the issued U.S.
patents and related patent applications became an exclusive worldwide license.
Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to
The Salk Institute on sales of products resulting from The Salk Institute's
NAChR technology. In addition, the Company is required to make minimum annual
royalty payments to The Salk Institute beginning in 2002. Failure to pay such
royalties will result in the related license becoming non-exclusive.

     In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of research at The
Salk Institute by SIBIA and the transfer of research materials and research
results in the EAAR area from The Salk Institute to SIBIA. SIBIA also received
an exclusive worldwide license to certain EAAR-related patents and patent
applications held by The Salk Institute. The agreement was amended in March
1996. Pursuant to the agreement, as amended, the Company is required to make
certain annual minimum royalty payments to The Salk Institute beginning in 2002.
Failure to pay such royalties will result in the related license becoming
non-exclusive.

     AURORA BIOSCIENCES CORPORATION

     In January 1997, the Company entered into an agreement with Aurora
Biosciences Corporation ("Aurora"). Under the agreement, the Company will
license to Aurora non-exclusive rights to practice its patented
transcription-based assay (TBA) technology, and certain other technologies
related to automated

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drug screening. In return, in addition to other consideration, the Company will
receive from Aurora non-exclusive rights to several assay technologies,
including novel reporter molecules, that will facilitate the Company's high
throughput screening and drug discovery efforts directed to certain receptor,
ion channel and enzyme targets associated with nervous system disorders. Both
parties have limited sublicensing rights to each other's patents.

     THE PARKINSON'S INSTITUTE

     SIBIA is collaborating with Dr. Maryka Quik, Clinical Research Associate at
the Parkinson's Institute, on the changes which occur in different NAChR and
VGCC subunit mRNAs in MPTP-treated monkeys as compared to control. These studies
may provide insight concerning alterations of specific NAChR and VGCC subtypes
in Parkinson's disease.

     THE MAYO CLINIC, JACKSONVILLE

     SIBIA is collaborating with Dr. Steven G. Younkin, Director of Research at
the Mayo Clinic, Jacksonville, on the effects of lead compounds in transgenic
animal models of Alzheimer's disease (in vivo).

     THE ROCKEFELLER UNIVERSITY

     SIBIA is collaborating with Dr. Rong Wang, a researcher in the Mass
Spectrometry Laboratory at Rockefeller, on the detection and quantitation of
A(beta) and related APP processing fragments in tissue culture, cerebrospinal
fluid and plasma samples.

     MT. SINAI SCHOOL OF MEDICINE

     SIBIA is collaborating with Dr. John Morrison, Professor and Co-Director,
Dr. Arthur M. Fishberg Research Center for Neurobiology, the Mt. Sinai School of
Medicine, on the preparation of antibodies against EAAR subtypes and the use of
these antibodies to map the receptor subtype distribution in the human brain.

     UNIVERSITY OF CHICAGO

     SIBIA is collaborating with Dr. Richard J. Miller, Professor, Department of
Pharmacology and Physiological Sciences, University of Chicago, on the
biophysical and pharmacological characterization of certain VGCC subtypes.

     UNIVERSITY OF BRISTOL, ENGLAND

     SIBIA is collaborating with Professor Timothy Gallagher, School of
Chemistry, University of Bristol, on the design and synthesis of novel
derivatives of a naturally occurring nicotinic acetylcholine agonist. Professor
Gallagher's work complements and expands SIBIA's internal drug discovery program
in this area.

PATENTS AND PROPRIETARY RIGHTS

     The Company's policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.

     SIBIA has established an extensive patent estate which it intends to
protect on behalf of its shareholders. On July 9, 1996, the Company filed an
action in the United States District Court for the Southern District of
California for patent infringement against Cadus Pharmaceutical Corporation


                                       16
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("Cadus"). The complaint asserts that Cadus' assay technology infringes the
Company's U.S. Patent No. 5,401,629 (the "629 Patent"), entitled "Assay Methods
and Compositions Useful for Measuring the Transduction of an Intracellular
Signal." Throughout the complaint, the Company seeks damages in an unspecified
amount and a preliminary and permanent injunction. See "Item 3. Legal
Proceedings."

     SIBIA has 56 pending applications for U.S. patents on its technology
relating to drug discovery for various nervous system diseases and disorders.
Fifteen of the currently pending U.S. patent applications cover the composition
or use of VGCC genes and the encoded subtypes. SIBIA has two issued patents
which include claims to DNAs encoding key structural components of VGCCs which
can be utilized in assays to identify compounds that modulate VGCC function.
SIBIA also has a U.S. patent which covers an assay method for the identification
of modulators of VGCCs containing an ((alpha)1C), ((alpha)1D) and/or
((alpha)2(delta)) subunit, singly or in combination. SIBIA has been granted a
European patent covering DNA encoding VGCC ((alpha)2(delta)) subunits and cells
expressing the same.

     Eight of SIBIA's pending U.S. patent applications cover the composition or
use of human NAChR genes and encoded subtypes. SIBIA also holds an issued patent
with claims to DNAs encoding key structural components of NAChRs. In addition,
SIBIA has an exclusive license from The Salk Institute to three patents with
claims to DNAs encoding various NAChR subunits.

     Within the EAAR class, SIBIA has six pending U.S. patent applications
covering human NMDA receptor genes and encoded subtypes and three pending U.S.
patent applications covering human metabotropic EAAR genes and encoded subtypes
that were filed in connection with ongoing research. SIBIA has an issued United
States Patent with claims to DNAs encoding human metabotropic receptors mGluR1b,
mGluR2, mGluR3 and mGluR5a-c and cells containing the same. SIBIA also has an
exclusive license from The Salk Institute to a patent with claims to DNAs
encoding various NMDA- and non-NMDA-type ligand-gated EAA receptor/ion channel
subtypes.

     Several of SIBIA's pending U.S. patent applications relate to functional
screening techniques that can be utilized in conjunction with receptor/ion
channel compositions for identifying drugs which have the potential for
treatment of disorders associated with the particular receptor or ion channel.
Two issued patents cover methods and compositions for identifying
receptor-modulating compounds based on detection of reporter gene transcription
in recombinant cell systems. In addition, six pending U.S. patent applications
and one foreign patent cover fluorescence-based automated systems for high
throughput functional screening of receptor-modulating compounds.

     Additionally, SIBIA has eight pending U.S. patent applications and three
issued patents covering the composition or use of compounds which modulate the
activity of NAChRs for the treatment of diseases involving these receptors
including an issued patent covering SIB-1508Y. Ten applications are being
pursued to cover the composition or use of compounds that modulate the
processing of proteins implicated in Alzheimer's disease. Applications for
foreign patents corresponding to the majority of the above described U.S.
applications covering receptor compositions and uses and screening technologies
have also been filed.

     SIBIA has a non-exclusive worldwide license to various patent applications
held by Aurora. The technology covered by these patent applications include
several assay technologies. See "Business -- Research Collaborations and
Licenses".

     The Company intends to file additional applications as appropriate for
patents covering its technologies, compounds and processes. There can be no
assurance that the Company will develop additional technologies, compounds or
processes that are patentable, that patents will issue from any patent
application or that claims allowed will be sufficient to protect the Company's
technologies, compounds or processes. Competitors may have filed applications,
may have been issued patents or may obtain additional patents and proprietary
rights relating to technologies, compounds or processes competitive with those
of the Company. The failure by the Company to adequately protect its


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technologies, compounds or processes covered by issued patents or to obtain
patents based on the applications referred to herein or any future applications
could have a material adverse effect on the Company's business.

     The patent positions of pharmaceutical and biotechnology firms, including
SIBIA, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, the Company does not know
whether any more of its applications will result in the issuance of patents or,
if any patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until a patent issues, and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, the Company cannot be certain that it was the first
creator of inventions covered by its pending patent applications or that it was
the first to file patent applications for such inventions.

     The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are based. It is uncertain whether any
third-party patents will require the Company to alter its technologies,
compounds or processes, obtain licenses or cease certain activities. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in the field in
which the Company is involved. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects with
claims made under the Company's applications. Such conflict could result in a
significant reduction of the coverage of the Company's patents, if issued. In
addition, if patents issued to other companies contain competitive or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable or acceptable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it may
require to develop and commercialize its compounds would have a material adverse
effect on the Company's business.

     Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third-party proprietary rights. Moreover, if
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office ("PTO") to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. Similarly, the Company may have to participate in
opposition proceedings with respect to granted European patents. The Company is
aware of a third-party patent application that may elicit an interference
proceeding with one of the Company's patent applications in the PTO. In
addition, the Company believes that certain claims in three of its other patent
applications may elicit such proceedings. There can be no assurance that the
Company will prevail in these proceedings. Also, there can be no assurance that
the validity of the Company's patents, if issued, would be upheld by a court of
competent jurisdiction. An adverse outcome in patent prosecution or in
litigation with respect to the validity of any of the Company's patents could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology, any of which could have a material adverse effect
on the Company's business.

     In addition, the recombinant Pichia pastoris yeast expression system
developed at SIBIA is protected by several patents that have issued to Phillips
Petroleum. These patents include claims to key Pichia gene regulatory elements,
marker genes and transformation methods that form the basis of the recombinant
expression system. SIBIA retains full rights to the general expression system
protected by these patents but does not have the right to sublicense this
technology. SIBIA has filed numerous applications and has been granted six U.S.
patents and two foreign patents pertaining to Pichia-based recombinant systems
for the production of certain proteins including human epidermal growth factor,
human IGF-1 and aprotinin.

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<PAGE>   19
SIBIA also has patents in vaccine-related technology. See "Risk Factors --
Uncertainty Regarding Patents and Proprietary Rights."

     In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.

COMPETITION

     Competition to develop drugs to treat nervous system disorders is intense
and expected to increase as knowledge and interest in the disorders addressed by
the products the Company is seeking to develop increases. The Company's most
significant competitors are fully integrated pharmaceutical companies and
established biotechnology companies. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical companies. In addition, the Company faces competition from
academic institutions, governmental agencies and other public and private
research organizations which conduct research, seek patent protection, and
establish collaborative arrangements for product and clinical development and
marketing. Furthermore, these companies and institutions compete with the
Company in recruiting and retaining highly qualified scientific and management
personnel.

     Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and clinical trials of new pharmaceutical products and in obtaining FDA
approval for products more rapidly than the Company. The Company has not
conducted clinical trials with respect to any of its compounds under development
and has not sought the approval of the FDA for any product based on such
compounds. Furthermore, if the Company is permitted to commence commercial sales
of products that it may develop, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has no
experience.

     Any product that the Company may succeed in developing, and for which it
gains regulatory approval, must then compete for market acceptance and market
share. For certain of the Company's potential products, an important competitive
factor will be the timing of market introduction. Accordingly, the Company
expects that the relative speed with which companies can develop products,
complete the clinical testing and approval processes and supply commercial
quantities of the product to the market will be important competitive factors.
With respect to clinical testing, competition may delay progress by limiting the
number of clinical investigators and patients available to test the Company's
potential products.

     In addition to the above factors, competition is based on product efficacy
and safety, the timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, price, patent position and reimbursement
coverage. See "Risk Factors -- Intense Competition; Rapid Technological Change."

MANUFACTURING

     The Company currently has no manufacturing facilities for clinical or
commercial production of any compounds currently under development or the
manufacture and distribution of products that may be developed. The Company is
currently relying on third-party manufacturers to produce its compounds for
preclinical and clinical purposes. Furthermore, the compounds under development
by the Company have never been manufactured on a commercial scale and may not be
able to be manufactured at a cost or in quantities to make commercially viable
products.

                                       19
<PAGE>   20
     The Company intends to establish arrangements with third-party
manufacturers to supply compounds for preclinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's preclinical and clinical testing schedule would be delayed, resulting
in the delay of submission of products for regulatory approval and initiation of
new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that it may develop, market introduction or penetration of such
products would be adversely affected. See "Risk Factors -- No Manufacturing or
Marketing Capability; Reliance on Third-Party Manufacturers and Marketers;
Absence of Sales and Marketing Experience."

SALES AND MARKETING

     The commercialization of products, such as those that may be developed by
the Company, is an expensive and time-consuming process. The Company has no
experience in sales, marketing or distribution. In order to market directly any
products that the Company may develop, the Company must develop a marketing and
sales force with technical expertise and supporting distribution capability.
Alternatively, the Company may seek to obtain the assistance of a pharmaceutical
or biotechnology company with a large distribution system and a large direct
sales force. See "Risk Factors -- No Manufacturing or Marketing Capability;
Reliance on Third-Party Manufacturers and Marketers; Absence of Sales and
Marketing Experience."

GOVERNMENT REGULATION

     The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the federal Food, Drug and
Cosmetic Act. Similar approvals by the comparable agencies are required in most
foreign countries. The FDA has established mandatory procedures and safety
standards that apply to the preclinical and clinical testing, manufacture and
marketing of pharmaceutical products. Obtaining FDA approval for a new
therapeutic takes several years and involves substantial expenditures.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities.

     As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess a drug's efficacy and
to identify potential safety problems. The results of these studies are
submitted to the FDA as part of an IND, which is filed to comply with FDA
regulations prior to beginning clinical trials.

     Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to (i)
assess the potential of the drug for specific, targeted indications; (ii)
evaluate dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to further evaluate clinical efficacy and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. Data from clinical trials are submitted to the FDA in a
New Drug Application ("NDA") or Product License Application ("PLA"). Preparing
an NDA or PLA involves considerable data collection, verification, analysis and
expense.

     The testing and approval process requires substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. The time period required for NDA review and approval may be affected
by a number of factors, including the severity of the disease, the availability
of alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional

                                       20
<PAGE>   21
animal studies or clinical trials may be requested during the FDA review period.
The FDA may ask one of its advisory committees to aid in its assessment of the
drug. All of these factors may delay marketing approval. The FDA may also
require post-marketing testing to monitor for adverse effects, which can involve
significant expense. FDA approval is limited to specified indications. Moreover,
the product label and promotional labeling and prescription drug advertising are
highly regulated by the FDA under the federal Food, Drug and Cosmetic Act. In
order to permit promotion of the approved product for indications not included
in the scope of the original approval, further clinical trials and FDA approval
may be necessary.

     NDA approval requires, among other things, that the prospective
manufacturer's quality control and manufacturing procedures conform to GMP
regulations. All manufacturing facilities, whether foreign or domestic, may be
subjected to a pre-NDA approval inspection. Additionally, domestic manufacturing
facilities are subject to biennial FDA inspections and foreign manufacturing
facilities are subject to periodic inspection by foreign regulatory authorities
as well as by the FDA where the FDA has a reciprocal inspection agreement with
the foreign regulatory authorities.

     For clinical investigation and marketing outside the United States, the
Company also is subject to foreign regulatory requirements governing clinical
trials and marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. The Company's approach to the European regulatory
process involves the identification of respected clinical investigators in the
member states of the European Economic Community ("EEC") to conduct clinical
studies. The Company intends to design these studies to meet both FDA and EEC
standards. Provided regulatory harmonization is finalized in the EEC, these
studies are designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage of regulatory requirements in some countries, such as in the United
Kingdom, which allow Phase I studies to commence after appropriate toxicology
and preclinical pharmacology studies but prior to formal regulatory approval.

     In December of 1996, the Company filed an IND with respect to SIB-1508Y for
the treatment of Parkinson's disease and in February 1997 the Company commenced
Phase I clinical trials on SIB-1508Y. See "Risk Factors -- Absence of Developed
Products; Early Stage of Development."

HUMAN RESOURCES

     As of December 31, 1996, the Company had 106 employees, 33 of whom hold
Ph.D. degrees. Ninety-six employees are engaged in, or directly support,
research development. The Company's employees are not covered by a collective
bargaining agreement and the Company considers its relations with its employees
to be excellent. The Company has entered into confidentiality agreement with all
of its employees.

RISK FACTORS

     EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED ("EXCHANGE ACT") INVOLVING
RISK AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THIS FORM 10-K. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE ABILITY TO DEVELOP SAFE AND
EFFICACIOUS DRUGS, VARIABILITY OF ROYALTY, LICENSE AND OTHER REVENUE, FAILURE TO
SATISFY PERFORMANCE OBLIGATIONS, ABILITY TO ENTER INTO FUTURE COLLABORATION
AGREEMENTS, UNCERTAINTY REGARDING THE COMPANY'S PATENTS AND PROPRIETARY RIGHTS
(INCLUDING THE RISK THAT THE COMPANY MAY BE FORCED TO ENGAGE IN COSTLY
LITIGATION TO PROTECT SUCH PATENT RIGHTS AND THE MATERIAL ADVERSE CONSEQUENCES
TO THE COMPANY IF THERE WERE UNFAVORABLE OUTCOME OF ANY SUCH LITIGATION), AS
WELL AS OTHER RISKS AND UNCERTAINTIES DISCUSSED IN THE FOLLOWING RISK FACTORS,
AND IN THE SECTIONS ENTITLED "BUSINESS" AND "MANAGEMENT'S DISCUSSION

                                       21
<PAGE>   22
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AS WELL AS THOSE
DISCUSSED IN ANY DOCUMENT INCORPORATED HEREIN BY REFERENCE.

ABSENCE OF DEVELOPED PRODUCTS; EARLY STAGE OF DEVELOPMENT

     SIBIA is an early-stage biotechnology company. The Company has no products
available for sale and does not expect to have any products resulting from its
research efforts, including its collaborations with others, commercially
available for at least several years, if at all. SIBIA has only filed an
Investigational New Drug ("IND") application with the U.S. Food and Drug
Administration ("FDA") on one of its compounds currently under research or
development, and no INDs have been filed by the Company's collaborative partners
on any compound in connection with their collaborations with the Company.
SIB-1508Y is the only compound for which the Company has filed an IND. Even
though clinical trials with respect to SIB-1508Y have commenced, SIB-1508Y may
prove to be ineffective in the treatment of Parkinson's disease, or have
undesirable or unintended side effects or other characteristics that prevent or
limit its commercial use, either of which could have a material adverse effect
on the Company's business. Furthermore, there can be no assurance that any
products will be successfully discovered or developed by the Company or its
collaborative partners, be approved for clinical trials, prove to be safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs or be marketed
successfully. The failure of the Company or its collaborative partners to
discover or develop commercially viable products or successfully market such
products would have a material adverse effect on the Company's business. See
"Business -- Drug Discovery Platforms and Development Programs."

     The Company's area of therapeutic focus, disorders of the nervous system is
not thoroughly understood and there can be no assurance that the compounds the
Company is seeking to develop will prove to be safe and effective in treating
nervous system disorders. The development of such compounds will require the
commitment of substantial resources to continue research and to conduct the
preclinical development and clinical trials necessary to bring such compounds to
market and to establish production and marketing capabilities. Drug research,
discovery and development by its nature is uncertain. There is a risk of delay
or failure at any stage, and the time required and cost involved in successfully
accomplishing the Company's objectives cannot be predicted. Actual drug
research, discovery and development costs could exceed budgeted amounts, which
could have a material adverse effect on the Company's business.

     The use of the Company's or its collaborative partners' compounds as
potential therapeutic compounds for nervous system disorders, particularly those
affecting the brain or spinal cord, is hindered by, among other things, the
inability of such compounds to pass readily from the blood to the brain or
spinal cord through the blood-brain barrier. The Company believes that
developing small molecule therapeutics may allow passage through the blood-brain
barrier; however, to date the Company has not demonstrated in any clinical
studies that its small molecule therapeutics will pass through the blood-brain
barrier. The inability of a compound to pass readily through the blood-brain
barrier would require the development of a different drug delivery mechanism,
which itself may entail considerable cost and risks and would be time-consuming.
Furthermore, there can be no assurance that an effective drug delivery mechanism
would be developed. Failure to solve any such drug delivery problems or any
other problems that may develop would have a material adverse effect on the
Company's business.

DEPENDENCE ON COLLABORATIVE RELATIONSHIPS

     The Company's strategy for the development, clinical testing, manufacturing
and commercialization of certain of its compounds includes entering into various
collaborations with corporate partners, licensors, licensees and others. The
Company has entered into collaborative arrangements with Lilly, Novartis,
Bristol-Myers Squibb and Meiji and intends to enter into additional
collaborations.

     The Company's current collaborators have received from SIBIA certain
exclusive rights to commercialize any products developed under their respective
agreements. These collaborators have

                                       22
<PAGE>   23
generally agreed to fund the research and development of compounds discovered
under their respective agreements, conduct clinical testing of lead compounds,
prepare and file submissions for regulatory approval, make milestone payments to
SIBIA upon the achievement of certain goals and pay royalties on any resulting
products. Under its agreements with these collaborators, the Company is
restricted in its ability to conduct research with third parties with respect to
the technology subject to the respective agreement. Under their respective
agreements, Lilly has rights of first negotiation with respect to certain
compounds discovered by the Company during the term of its agreement with SIBIA,
Novartis has exclusive rights to compounds discovered by the Company during the
term of its agreement with SIBIA and rights of first negotiation to compounds
discovered by the Company during the three-year period following the term of
such agreement and Bristol-Myers Squibb has exclusive rights to compounds
discovered by the Company during the term of its agreement with SIBIA. There can
be no assurance that these collaborations will continue or be successful or that
any products will be developed. Moreover, Novartis and Bristol-Myers Squibb,
under their respective agreements, have the sole and exclusive right to select
compounds for further development and halt or delay the testing of any compounds
selected for development. Under the Company's recent agreement with Meiji, all
clinical development, product finishing, marketing and sales for Japan and
certain other Asian countries with respect to products produced from SIB-1508Y,
if any, will be controlled by Meiji. The amount and timing of resources
dedicated by these collaborators under their respective agreements also is not
within the control of the Company. There can be no assurance that the Company
will ever receive any milestone or royalty payments under these agreements. In
addition, if products that may be developed under such agreements are approved
for marketing, any revenues to the Company from such products will be dependent
on the marketing and sales efforts of these collaborators.

     Each of the collaborative parties has the right to terminate its respective
collaboration under certain circumstances, including upon the occurrence of a
material breach and, in certain cases, upon a change in control. Furthermore,
Lilly can terminate its collaboration with the Company upon three months' prior
written notice, which may be given at anytime after August 1, 1997, and Novartis
can terminate its collaboration with the Company upon six months' prior written
notice, which may be given at anytime beginning September 1997. Under the terms
of the agreement, additional pre-clinical tests will be performed to determine
the potential of SIB-1508Y for use in the manner contemplated by the agreement.
In the event such tests do not yield acceptable results, Meiji may terminate the
agreement and the Company will be obligated to return to Meiji substantially all
of its upfront technology Access Fee. There can be no assurance that
collaborators will not terminate their respective collaborations. In addition,
there can be no assurance that collaborators will not pursue alternative
technologies to develop treatments for the diseases targeted by the respective
collaborative programs. If any of the Company's collaborative partners
terminates or breaches its agreement with the Company or fails to devote
adequate resources to or to conduct in a timely manner its collaborative
activities, the research program under the applicable collaborative agreement or
the development and commercialization of drug candidates subject to such
collaboration would be materially adversely affected, which would have a
material adverse effect on the Company's business. In addition, because the
Company's collaborative agreements have accounted for 89%, 81% and 97% of total
revenues for the years ended December 31, 1994, 1995 and 1996, respectively,
such a termination or breach could materially adversely affect the Company's
results of operations and financial condition. Also, there can be no assurance
that a research program covered by a particular collaborative agreement does not
or will not conflict with any research programs covered by the Company's other
collaborations. The occurrence of any such conflict could have a material
adverse effect on the Company's business.

     The Company intends to enter into additional collaborative arrangements
with pharmaceutical and biotechnology companies to develop and commercialize
certain of its compounds in the future. There can be no assurance that the
Company will be able to negotiate collaborative arrangements in the future on
acceptable terms, if at all, or that such collaborative arrangements will be
successful. Most of the Company's competitors similarly are seeking to develop
or expand their collaborative relationships with pharmaceutical and
biotechnology companies. To the extent that the Company is not able to establish
such arrangements or any of its existing arrangements are terminated, it would
require significant capital to undertake development, regulatory, manufacturing
and marketing activities at its own expense and

                                       23
<PAGE>   24
may be required to curtail significantly or eliminate one or more of its
research, discovery or development programs, either of which could have a
material adverse effect on the Company's business. In addition, the Company may
encounter significant delays in introducing into certain markets products that
it may develop or find that the development, manufacture or sale of such
products in such markets is adversely affected by the absence of such
collaborative arrangements.

NEW AND UNCERTAIN TECHNOLOGY

     The Company's proprietary nervous system technologies, which comprise the
human receptor/ion channel subtype technology and human protease technology, are
unproven and relatively new compared to traditional methods of drug discovery.
The Company uses its technologies to isolate and identify molecular targets that
it believes play an important role in nervous system function and nervous system
disorders. The ability of the Company to screen potential compounds, select
product candidates and develop products is dependent in large part upon the
number of such targets available for screening and whether the expected
functionality of such targets plays an important role in nervous system function
and nervous system disorders. There can be no assurance that the use of such
technologies will lead to the discovery or development of commercial
pharmaceutical products that are safe and efficacious in treating any nervous
system disorder. Failure to develop any such product would have a material
adverse effect on the Company's business.

HISTORY OF OPERATING LOSSES

     The Company is at an early stage of development with respect to its nervous
system technologies and its compounds. Except for 1995, the Company has incurred
net losses every year since it shifted its area of therapeutic focus to the
central nervous system in 1991. As of December 31, 1996, the Company had
accumulated net losses of approximately $21.7 million. The Company is continuing
to incur losses and expects to incur increasing operating losses over the next
several years as the Company's research and development expenditures increase.
The Company's revenue for the short term will be limited to payments under its
existing or future strategic alliance agreements. There can be no assurance that
the Company will ever achieve or sustain significant revenues or profitable
operations. To achieve significant revenues or profitable operations, the
Company, alone or with its collaborators, must successfully develop, manufacture
and market safe and efficacious products and obtain the regulatory approvals
required for their testing, manufacture and sale. Failure to achieve significant
revenues or profitable operations could impair the Company's ability to sustain
operations. There can be no assurance that the Company will be successful in
entering into additional collaborative arrangements or that any such
arrangements will result in revenues or that the Company will receive additional
revenues under existing collaboration arrangements. The Company has not yet
received any revenues from the achievement of milestones from the discovery or
development of, or royalties from the sale of, commercial drugs by Lilly,
Novartis, Bristol-Myers Squibb or Meiji, and such revenues, if any, are not
expected to represent a material amount of the Company's total revenues for
several years, if at all.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

     The Company will require substantial additional funds to conduct the
research and development and preclinical and clinical testing of its compounds
and to manufacture and market any products that may be developed. Although the
Company plans to contract with third parties to manufacture and market any
products that may be developed, to the extent the Company is unsuccessful and is
required to establish its own manufacturing capacity or marketing program, it
will require substantial additional capital. The Company's future capital needs
will be dependent upon many factors, including progress in its research and
development activities, the magnitude and scope of these activities, progress
with preclinical and clinical trials, the cost of preparing, filing,
prosecuting, maintaining, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in or terminations of existing collaborative arrangements, the
establishment of additional collaborative arrangements, and the cost of
manufacturing scale-up and development of marketing activities, if undertaken by
the Company. The Company expects to expend substantial funds in connection with



                                       24
<PAGE>   25
research and development and in the area of intellectual property. Funds
generated from payments under existing collaborative agreements, together with
the Company's current cash reserves, will be insufficient to fund the Company's
operations through the completion of any clinical trials and commercialization
of its first product, if developed. Although the Company will seek to obtain
additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, there can be no assurance that additional financing will be available
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities, further dilution to then existing
stockholders would result. If adequate funds are not available, the Company may
be required to curtail significantly or eliminate one or more of its research,
discovery or development programs or obtain funds through additional
arrangements with corporate partners or others which may require the Company to
relinquish rights to certain of its technologies or product candidates that the
Company would not otherwise relinquish, which could have a material adverse
effect on the Company's business.

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

     The field in which the Company is involved is characterized by extensive
research efforts, rapid technological change and intense competition from
numerous organizations including pharmaceutical companies, biotechnology
companies, universities and other research organizations. Products and therapies
currently exist on the market that will compete directly with the products that
the Company is seeking to develop and market to address nervous system
disorders. In addition, new developments occur and are expected to continue to
occur at a rapid pace. Competition from fully integrated pharmaceutical
companies and biotechnology companies is intense and is expected to increase.
Many of these companies have significantly greater financial resources and
expertise in research and development, manufacturing, preclinical and clinical
testing, obtaining regulatory approvals and marketing than the Company. Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large pharmaceutical companies. Many of these
competitors have significant nervous system products approved or in development
and operate large, well-funded nervous system research and development programs.
Academic institutions, governmental agencies and other public and private
research organizations also conduct research, seek patent protection and
establish collaborative arrangements for the clinical development of compounds
and marketing of products. The Company's competitors may succeed in discovering
and developing products more rapidly than the Company and its collaborative
partners or products that are more effective or more affordable than any that
may be developed by the Company and its collaborative partners and may also
prove to be more successful than the Company and its collaborative partners in
production and marketing. There can be no assurance that research, discoveries
or commercial developments by others will not render any of the Company's or its
collaborative partners' programs or potential products obsolete or
noncompetitive, any of which would have a material adverse effect on the
Company's business. Moreover, there can be no assurance that the Company's
competitors will not obtain patent protection or other intellectual property
rights that would limit the Company's or its collaborative partners' ability to
use the Company's technology or commercialize products that may be developed.

UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS

     The Company's success will depend in part on its ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and other countries. The patent positions
of biotechnology and pharmaceutical companies can be highly uncertain and
involve complex legal and factual questions, and therefore, the breadth of
claims allowed in biotechnology and pharmaceutical patents cannot be predicted.
There can be no assurance that patents issued to or licensed by the Company will
not be infringed or will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide proprietary protection to the
Company's technology or products that the Company may develop or other
competitive advantages to the Company.

     SIBIA has 56 pending applications for U.S. patents on its technology
relating to drug discovery for various nervous system disorders. To date, the
Company has licensed four U.S. patents from The Salk


                                       25
<PAGE>   26
Institute related to SIBIA's human receptor/ion channel subtype technology, as
well as continuations-in-part and foreign counterparts of these patents. The
Company intends to file additional applications as appropriate for patents
covering its technologies, compounds and processes. There can be no assurance
that the Company will develop additional technologies, compounds or processes
that are patentable, that patents will issue from any patent application or that
claims allowed will be sufficient to protect the Company's technologies,
compounds or processes. Competitors may have filed applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to technologies, compounds or processes competitive with those of the Company.
The failure by the Company to adequately protect its technologies, compounds or
processes covered by issued patents or to obtain patents based on the
applications referred to herein or any future applications could have a material
adverse effect on the Company's business.

     The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are based. It is uncertain whether any
third-party patents will require the Company to alter its technologies,
compounds or processes, obtain licenses or cease certain activities. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in the field in
which the Company is involved. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects with
claims made under the Company's applications. Such conflict could result in a
significant reduction of the coverage of the Company's patents, if issued. In
addition, if patents issued to other companies contain competitive or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable or acceptable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it may
require to develop and commercialize its compounds would have a material adverse
effect on the Company's business.

     Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third-party proprietary rights. Moreover, if
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office ("PTO") to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. Similarly, the Company may have to participate in
opposition proceedings with respect to granted European patents. The Company is
aware of a third-party patent application that may elicit an interference
proceeding with one of the Company's patent applications in the PTO. In
addition, the Company believes that certain claims in three of its other patent
applications may elicit such proceedings. There can be no assurance that the
Company will prevail in these proceedings. Also, there can be no assurance that
the validity of the Company's patents, if issued, would be upheld by a court of
competent jurisdiction. An adverse outcome in patent prosecution or in
litigation with respect to the validity of any of the Company's patents could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology, any of which could have a material adverse effect
on the Company's business.

     In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.

                                       26
<PAGE>   27
NO ASSURANCE OF REGULATORY APPROVAL; GOVERNMENT REGULATION

     The production and marketing of products that the Company may develop and
its ongoing research and development activities are subject to extensive
regulation by numerous governmental authorities in the United States and other
countries. Prior to marketing in the United States, any drug developed by the
Company must undergo rigorous preclinical and clinical testing and an extensive
regulatory approval process implemented by the FDA under the federal Food, Drug
and Cosmetic Act. To market products abroad, the Company also would be subject
to foreign regulatory requirements, implemented by foreign health authorities,
governing clinical trials and marketing approval for drugs. Satisfaction of such
regulatory requirements, which includes demonstrating to the satisfaction of the
FDA that the product is both safe and effective, typically takes several years
or more depending upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources. Preclinical studies must be
conducted, as appropriate, in conformance with the FDA's good laboratory
practice regulations. Clinical trials will be vigorously regulated and must meet
requirements for institutional review board oversight and informed consent as
well as FDA review and oversight and under good clinical practice regulations.
The Company has no experience in developing a product through the clinical trial
process, which is necessary to obtain regulatory approval. The Company intends
to establish collaborative relationships to conduct clinical trials and seek
regulatory approvals to market products that it may develop, although there can
be no assurance that such approvals will be received on a timely basis, if at
all. Clinical trials require the recruitment of large numbers of test subjects,
particularly for products that are intended to treat nervous system disorders.
There can be no assurance that those conducting clinical trials for the Company
will be able to initiate such trials at preferred clinical test sites or recruit
sufficient test subjects, or that such trials will be started or completed
successfully within any specified time period, if at all, with respect to any of
the products that the Company may develop. Furthermore, the Company or the FDA
may suspend clinical trials at any time if it is determined that the subjects
participating in such trials are being exposed to unacceptable health risks.
There can be no assurance that the Company will not encounter problems in
clinical trials (including SIB-1508Y) which would cause the Company or the FDA
to delay or suspend clinical trials. Any such delay or suspension could have a
material adverse effect on the Company's business. There can be no assurance
that any compound (including SIB-1508Y) that may be developed by the Company
alone or in conjunction with others will prove to be safe and efficacious in
clinical trials and meet all of the applicable regulatory requirements needed to
receive marketing approval. If regulatory approval of a product is granted, such
approval will be limited to those disease states and conditions for which the
product is useful, as demonstrated through clinical studies.

     There can be no assurance that delays or rejections will not be encountered
based upon additional government regulation from future legislation or
administrative action or that changes will not be made in FDA policy during the
period of product development and FDA regulatory review of each submitted new
drug application. Similar delays may also be encountered in foreign countries.
Furthermore, product approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product and
its manufacturer and its manufacturing facilities are subject to continual
review and periodic inspections, and the regulatory standards for manufacturing
are currently being applied stringently by the FDA. Later discovery of
previously unknown problems with a product or a manufacturer or its facility may
result in restrictions on such product or manufacturer, including withdrawal of
the product from the market, which would have a material adverse effect on the
Company's business.


                                       27
<PAGE>   28
NO MANUFACTURING OR MARKETING CAPABILITY; RELIANCE ON THIRD-PARTY MANUFACTURERS
AND MARKETERS; ABSENCE OF SALES AND MARKETING EXPERIENCE

     The Company currently has no manufacturing facilities for clinical or
commercial production of any compounds currently under development or marketing
capability for the distribution of any products that may be developed. The
Company is currently relying on third-party manufacturers to produce its
compounds for preclinical and clinical purposes. The only compound under
development by the Company, SIB-1508Y, has never been manufactured on a
commercial scale and there can be no assurance that such compound, or any other
compound the Company or its collaborators may develop, can be manufactured at a
cost or in quantities to make commercially viable products.

     The Company intends to establish arrangements with third-party
manufacturers to supply compounds for preclinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's preclinical and clinical testing schedule would be delayed, resulting
in the delay of submission of compounds for regulatory approval and initiation
of new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that the Company may develop, market introduction or penetration of
such products would be adversely affected. Moreover, third-party manufacturers
that the Company may use must adhere to good manufacturing practice regulations
enforced by the FDA through its facilities inspection program. If facilities of
third-party manufacturers cannot pass a pre-approval plant inspection, the FDA
approval of products that may be developed by the Company will be adversely
affected.

     The Company has no experience in sales, marketing or distribution. In order
to market directly any products that it may develop, the Company must develop or
obtain access to a substantial marketing staff and sales force with technical
expertise and supporting distribution capability. Alternatively, the Company may
seek to obtain the assistance of a pharmaceutical or biotechnology company with
a large distribution system and a large direct sales force. There can be no
assurance that the Company will be able to establish such a marketing staff or
sales force, that the Company's sales and marketing efforts will be successful,
or that the Company will be able to obtain the assistance of another
pharmaceutical or biotechnology company in these efforts. To the extent the
Company enters into arrangements with third parties for the marketing and sale
of products it may develop, any revenues received by the Company will be
dependent on the efforts of such third parties, and there can be no assurance
that such efforts will be successful. Failure to establish adequate sales,
marketing and distribution capabilities independently or with others would have
a material adverse effect on the Company's business.

MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN
KEY EMPLOYEES AND CONSULTANTS

     To expand its research and development programs and pursue its product
development plans, the Company will be required to hire additional qualified
scientific personnel to perform research and development, as well as personnel
with expertise in clinical testing and government regulation. These requirements
are also expected to necessitate the addition of management personnel and the
development of additional expertise by existing management personnel. The
failure to attract such personnel or to develop or acquire such expertise would
have a material adverse effect on the Company's business. As part of this
growth, the Company will be required to enter into additional collaborative
arrangements and successfully manage these, along with its current,
collaborative arrangements. To the extent the Company does not enter into
collaborative agreements with third parties, it will also be required to hire
manufacturing and marketing personnel. If the Company is unable to manage its
growth effectively, the Company's business would be materially adversely
affected.

     The Company is highly dependent on the principal members of its scientific
and management staff, and the loss of any of these members might significantly
delay the achievement of the Company's


                                       28
<PAGE>   29
development objectives. The Company does not maintain "key man" insurance on any
of its employees, nor does the Company intend to secure such insurance. In
addition, the Company relies on consultants and advisors, including its
scientific advisors, to assist the Company in formulating its research and
development strategy. Retaining and attracting qualified personnel, consultants
and advisors will be critical to the Company's success. The Company faces
competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. There can
be no assurance that the Company will be able to attract and retain such
individuals on acceptable terms or at all. The failure to attract or retain such
personnel would have a material adverse effect on the Company's business.

CONTROL BY PRINCIPAL STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS

     The Salk Institute and its affiliates beneficially owned approximately 22%
of the outstanding shares of Common Stock of SIBIA as of January 31, 1997. In
addition, as of January 31, 1997, the present directors and executive officers
of the Company beneficially owned approximately 8% of the outstanding shares of
Common Stock. Accordingly, together with The Salk Institute, the present
directors and executive officers of the Company have the ability to exercise
substantial influence over the outcome of most stockholders' actions. Moreover,
the Company's Certificate of Incorporation does not provide for cumulative
voting with respect to the election of directors. Consequently, the present
directors and executive officers, together with The Salk Institute, are able to
exercise substantial influence over the election of the members of the Board of
Directors. Such concentration of ownership could have an adverse effect on the
price of SIBIA's Common Stock. In addition, the Company's Certificate of
Incorporation 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. In addition, certain of the Company's collaborative
partners have the right to terminate their respective agreements with the
Company upon certain changes in control of the Company, which may discourage
acquisitions or other changes in control (including those in which stockholders
of the Company might otherwise receive a premium for their shares over then
current market prices).

     In addition, the Board of Directors has the authority, without action by
stockholders, to issue additional shares of Common Stock and to fix the rights
and preferences of and issue shares of Preferred Stock, either of which may have
the effect of delaying or preventing a change in control of the Company.

     Furthermore, the Company has certain rights of first refusal with respect
to shares of Common Stock of the Company held by certain of its collaborative
partners which such partners may desire to sell. In March 1997, the Board of
Directors authorized and adopted a Preferred Share Purchase Rights Plan (the
"Rights Plan") pursuant to which the Company has issued right (the "Rights") to
the holders of its Common Stock to purchase a specified class of Preferred
Stock of the Company. The Rights detach from the Common Stock and become
exerciseable following the announcement of an acquisition by a person or group
(the "Acquirer") of 15% of the Company's outstanding Common Stock or ten
business days (or later if delayed by the Board of Director) after the
announcement of an intention on the part of the Acquirer to tender for at least
15% of the Company's outstanding Common Stock.

     The principal purpose for the Rights Plan is to improve the bargaining
power of the Board of Directors in seeking to protect and maximize stockholder
value when an unsolicited takeover attempt occurs. Although adoption of the
Rights Plan will not prevent a takeover of the Company, it may discourage
abusive and coercive takeover tactics that result in a rapid, forced sale of the
Company at a lower price than might otherwise be obtainable. The existence of a
Rights Plan may confront the Board of Directors with difficult decisions with
respect to redemption or amendment of the outstanding Rights.In addition, once a
hostile bidder crosses a certain threshold, the Rights become non-redeemable and
the Board of Directors' ability to enter into a negotiated acquisition would be
impaired. However, there can be


                                       29
<PAGE>   30
no assurance that the Rights Plan will maximize shareholder value. Furthermore,
no assurance that the Rights Plan will not discourage potential bidders from
attempting to gain control of the Company. The foregoing charter provisions as
well as other charter provisions, the rights of first refusal in favor of the
Company, the shareholder rights plan and certain provisions of Delaware law, may
discourage 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 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.

PRODUCT LIABILITY EXPOSURE AND UNINSURED RISKS

     The testing of compounds and the marketing and sale of commercial
pharmaceutical products involves unavoidable risks. The use of any of the
Company's compounds or its collaborative partners' compounds in clinical trials
and the sale of any products that may be developed may expose the Company to
potential liability resulting from the use of such compounds or products. Such
liability might result from claims made directly by consumers or by regulatory
agencies, pharmaceutical companies or others using or selling such compounds or
products. The Company has obtained insurance coverage for its current clinical
trials. The Company intends to seek additional insurance coverage if and when
the Company develops products that are ready to be commercialized. There can be
no assurance that the Company will be able to obtain or maintain product
liability insurance in the future on acceptable terms or that, if obtained, the
insurance coverage will be sufficient to cover any potential claims or
liabilities.

HAZARDOUS MATERIALS

     The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for storing, handling and disposing
of such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company.

VOLATILITY OF STOCK PRICE

     The market price of the shares of SIBIA's Common Stock, like that of the
common stock of many other early-stage biotechnology companies, is highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new commercial therapeutic
products by the Company or its competitors, progress with clinical trials,
governmental regulation, developments in patent or other proprietary rights
(including litigation matters), developments in the Company's relationships with
current or future collaborative partners, if any, public concern as to the
safety and efficacy of products that may be developed by the Company (including
SIB-1508Y) and general market conditions may have a significant effect on the
market price of the Common Stock.

                                       30
<PAGE>   31
EXECUTIVE OFFICERS

The Executive Officers and their ages as of January 31, 1997 are as follows:

William T. Comer, Ph.D. .............................61
President, Chief Executive Officer and Director

     Dr. Comer has been President, Chief Executive Officer and a Director of
SIBIA since April 1991. Prior to joining SIBIA, Dr. Comer worked for
Bristol-Myers Squibb for nearly 30 years in various scientific and management
positions. He served as Executive Vice President, Science & Technology, and then
President, Pharmaceutical Research & Licensing at Bristol-Myers Squibb from
April 1989 until April 1990. Thereafter, he served as Senior Vice President,
Strategic Management -- Pharmaceuticals and Nutritionals at Bristol-Myers Squibb
until March 1991. Dr. Comer received a B.A. degree from Carleton College and a
Ph.D. in Organic Chemistry and Pharmacology from the University of Iowa. Dr.
Comer is currently a director of Houghten Pharmaceuticals, Inc., Cytel
Corporation, the University of California, San Diego ("UCSD") Cancer Center
Foundation and The San Diego Chamber Orchestra. He is also a member of the
Governor's Council on Biotechnology and the UCSD Industrial Advisory Committee
for the Department of Chemistry.

Michael M. Harpold, Ph.D. ...........................47
Vice President, Research

     Dr. Harpold has been Vice President, Research since 1986 and was a founding
member of SIBIA's scientific staff and Research Director from 1981 to 1986. From
1979 to 1981, he was Assistant Professor of Biochemistry at the University of
Southern California School of Medicine and Member of the Kenneth Norris, Jr.
Comprehensive Cancer Center. Dr. Harpold received his B.S. degree from Texas
Christian University and a Ph.D. in Developmental and Molecular Cell Biology
from Tulane University and was a Helen Hay Whitney Research Fellow at The
Rockefeller University from 1976 to 1979.

G. Kenneth Lloyd, Ph.D. .............................52
Vice President, Pharmaceuticals -- Biology

     Dr. Lloyd has been Vice President, Pharmaceuticals -- Biology since 1994.
He joined SIBIA in October 1992. Beginning in 1977, Dr. Lloyd worked for
Synthelabo S.A. where he held various management positions culminating with six
years as Associate Director, Biology with responsibility for nervous system,
cerebrovascular, bronchopulmonary, gastrointestinal and inflammation research.
From 1990 to 1992, Dr. Lloyd was Assistant Vice President of Research and
Director of Research (U.K.) for Wyeth-Ayerst Research. Dr. Lloyd serves on the
Scientific Advisory Boards of Epigenesis and the Huntington Chorea Society of
Canada. He received his B.S. and M.S. degrees from McGill University and a Ph.D.
from the University of Toronto. He held a postdoctoral position at F. Hoffman La
Roche & Co. Ltd. in Basel, Switzerland.

Ian A. McDonald, Ph.D. ..............................49
Vice President, Pharmaceuticals -- Chemistry

     Dr. McDonald has been Vice President, Pharmaceuticals -- Chemistry since
1994. He joined SIBIA as Director of Chemistry in February 1993. He has held
senior scientist positions at the State Health Laboratory Service in Perth,
Australia, at the Australian National University; the Centre de Recherche
Merrell International, Strasbourg, France; and he was a Group Leader and Senior
Research Scientist, Marion Merrell Dow Research Institute (formerly Merrell
Dow), Cincinnati, Ohio during the period July 1985 to February 1993. He received
his B.S. degree and Ph.D. from the School of Chemistry, the University of
Western Australia. He completed his postdoctoral studies at the Organic
Chemistry Institute of the University of Zurich, Switzerland.

                                       31
<PAGE>   32
David E. McClure, Ph.D. ............................49
Vice President, Clinical Development and Regulatory

     Dr. McClure has been Vice President, Clinical Development and Regulatory
since September 1996. From 1992 to 1996, Dr. McClure served as Director, Product
Development and Project Management at Molecular Biosystems, Inc. From 1988 to
1992, he served as Assistant Director, Oncology Clinical and Medical Affairs,
and as Senior Project Development Manager, Drug Development Department at ICI
Pharmaceuticals Group. From 1983 to 1988, Dr. McClure served as Development Team
Chairperson and Section Head, Medicinal Chemistry at McNeil Pharmaceutical
(Johnson & Johnson). He started his career at Merck Research Laboratories as a
medicinal chemist. He received his B.S. degree in Chemistry from Nebraska
Wesleyan University, a Ph.D. in Organic Chemistry from Stanford University, and
conducted post-doctoral work from 1973 to 1975 at Columbia University.

Michael J. Dunn ....................................41
Vice President, Business Development

     Mr. Dunn has been with SIBIA since the Company's inception. He has been
Vice President, Business Development since August 1995. From 1992 to 1995, he
was Director, Business Development and was Manager of Business Development from
September 1991 to April 1992. He received a B.A. degree from the University of
Chicago and an M.B.A. degree from the University of San Diego.

Thomas A. Reed .....................................40
Vice President, Finance/Administration and Chief Financial Officer

     Mr. Reed has been with SIBIA since the Company's inception. He has been
Vice President, Finance/Administration and Chief Financial Officer since August
1995. From 1991 to 1995, he was Director, Finance and was Manager of Business
and Market Evaluation from January 1989 to April 1991. He received a B.A. degree
from the University of California, Berkeley and an M.B.A. degree from the
University of San Diego.

ITEM 2. PROPERTIES

     The Company's facilities are located in La Jolla, California. As of the
dated of this Report, the Company leases approximately 49,000 square feet of
space used for laboratory and administrative purposes of which approximately
6,267 square feet is sublet. SIBIA believes that its present facility will be
adequate to conduct its research activities through December 2001, when its
current lease expires. The Company has an option to extend its lease for an
additional five years. Management believes that it will be able to secure
additional space at commercially reasonable rates during the terms of such
lease, if necessary.

ITEM 3. LEGAL PROCEEDINGS

     On July 9, 1996, the Company filed an action in the United States District
Court for the Southern District of California, for patent infringement against
Cadus Pharmaceutical Corporation ("Cadus"). The complaint asserts that Cadus'
assay technology infringes the Company's U.S. Patent No. 5,401,629 (the "629
patent"), entitled "Assay Methods and Compositions Useful for Measuring the
Transduction of an Intracellular Signal". Through the complaint, the Company
seeks damages in an unspecified amount and a preliminary and permanent
injunction.

     On August 1, 1996, Cadus filed its answer and counterclaim to the Company's
complaint. The counterclaim asserts claims that the 629 patent and the Company's
5,436,128 patent are invalid and/or unenforceable and further asserts claims for
intentional interference with prospective economic advantage and unfair
competition. The counterclaim seeks declaratory relief and compensatory and
punitive damages in an unspecified amount.


                                       32
<PAGE>   33
     Company management believes that its complaint against Cadus is
well-founded and necessary to protect the value of its intellectual property
portfolio. Management believes that Cadus' counterclaim is without merit and
intends to vigorously prosecute its claim of infringement and oppose Cadus'
counterclaim.

     Management believes that the ultimate resolution of the above matter will
not have a material adverse impact on the Company's financial position, results
of operations or cash flow.

     In addition to the above, the Company is involved in certain legal or
administrative proceedings generally incidental to its normal business
activities. While the outcome of any such proceedings cannot be accurately
predicted, the Company does not believe the ultimate resolution of any such
existing matters will have a material adverse effect on its financial position,
results of operations or cash flows.

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

     No matters were submitted to a vote of the Company's Security holders
during the fourth quarter of the year ended December 31, 1996.

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     The Company's Common Stock is traded in the over-the-counter market and
prices are quoted on the Nasdaq Stock Market under the symbol "SIBI". The
following table sets forth the high and low sales prices as reported by The
Nasdaq Stock Market for the periods indicated and since May 9, 1996, the date of
the Company's initial public offering.

<TABLE>
<CAPTION>
                1996                                            HIGH         LOW
                ----                                            ----         ---
<S>                                                            <C>          <C>
            Second Quarter (May 9, 1996 - June 30, 1996)       11.50        6.88
            Third Quarter                                       8.25        5.50
            Fourth Quarter                                      8.25        6.25
</TABLE>

     On January 31, 1997, the closing sales price of the Company's Common Stock
as reported by The Nasdaq Stock Market was $8.50 per share. There were
approximately 800 holders of record of the Common Stock of the Company as of
such date. The Company has not paid cash dividends on its Common Stock and does
not intend to do so in the foreseeable future.

     RECENT SALES OF UNREGISTERED SECURITIES

     Since January 1, 1996, the Company has sold and issued the following
securities which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):

     (1) On May 9, 1996, the Company issued and sold an aggregate of 454,545
shares of its Common Stock to Novartis for a total sales price of $5,000,000.
Such shares were sold pursuant to the Stock Purchase Agreement dated March 20,
1996 between the Company and Novartis filed as Exhibit 10.30 to this Report.

     (2) In March 1996, the Company effected a 2.35-for-1 stock split of the
outstanding Common Stock whereby each share of outstanding Common Stock was
exchanged for 2.35 shares of Common Stock. As a result of the stock split, each
share of outstanding Series A, Series B and Series C Convertible Preferred Stock
were converted into 2.35 shares of Common Stock effective upon the closing of
the Company's initial public offering.

                                       33
<PAGE>   34
     (3) From January 1, 1996 to December 31, 1996, the Company granted stock
options to its directors, officers, employees and consultants covering an
aggregate of 372,007 shares of Common Stock at a weighted average exercise price
of $4.48 per share.

     (4) During the period January 1, 1996 to May 9, 1996, the Company issued
and sold 399,028 shares of Common Stock for an aggregate of $725,968 of the
Company pursuant to the exercise of stock options granted to directors,
officers, employees and consultants of the Company.

     The sales and issuances of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.

     With respect to the grant of stock options and the issuance of Common Stock
pursuant to the exercise of options described in paragraphs (3) and (4) above
were deemed to be exempt from registration under the Securities Act by virtue of
Rule 701 promulgated thereunder in that they were offered and sold either
pursuant to written compensatory benefit plans or pursuant to a written contract
relating to compensation, as provided by Rule 701.

ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts)

     The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1996. The information should be
read in conjunction with the financial statements included elsewhere in this
report.

<TABLE>
<CAPTION>
                                                              Years ended December 31,
                                              1996         1995         1994         1993         1992
<S>                                         <C>          <C>          <C>          <C>          <C>
Statement of Operations Data:
   Total revenue                            $  8,481     $ 10,448     $  4,852     $  5,077     $  3,196
   Research and development expenses        $ 12,268     $  8,949     $  8,663     $  7,713     $  5,446
   Net income (loss)                        $ (5,564)    $  2,926     $    (27)    $ (4,550)    $ (3,998)
   Net income (loss) per common share       $  (0.73)    $    .42
   Shares used in computing net income
     (loss) per common share                   7,596        6,928

Balance Sheet Data:
   Cash, cash equivalents and investment
     securities                             $ 37,532     $ 16,488     $  5,944     $  4,584     $  7,820
   Working capital                          $ 35,324     $ 14,338     $  4,523     $  2,016     $  6,614
   Total assets                             $ 39,983     $ 18,251     $  8,005     $  6,451     $  8,873
   Long-term capital lease obligations      $    519     $    721     $    860     $    761     $    151
   Accumulated deficit                      $(21,693)    $(16,129)    $(19,055)    $(19,028)    $(14,478)
   Total Stockholders' equity               $ 36,572     $ 15,107     $  5,166     $  2,588     $  6,986
</TABLE>

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

OVERVIEW

     SIBIA, incorporated in Delaware in 1981, was established by The Salk
Institute for Biological Studies. Through 1990, SIBIA successfully developed
several proprietary life-sciences technologies in collaboration with corporate
partners. In 1987, SIBIA initiated research in the neuroscience field and in
1991 shifted its focus completely to the development of novel therapeutics to
treat nervous system disorders.

                                       34
<PAGE>   35
     SIBIA is engaged in the discovery and development of novel, small molecule
therapeutics for nervous system disorders based on the Company's unique approach
to characterizing the molecular processes involved in such disorders. SIBIA is
focusing its efforts on discovering and developing compounds for the treatment
of Parkinson's disease, Alzheimer's disease, stroke, depression, head trauma,
epilepsy, chronic pain, schizophrenia and other neurological, psychiatric and
neurodegenerative disorders, many of which have large patient populations and
represent critical unmet medical needs. SIBIA has financed its operations
primarily through the sale of Convertible Preferred Stock and Common Stock and
through funds provided by its collaborative partners under its collaborative
agreements. In addition, SIBIA has received funds from the sale of its interest
in a corporate joint venture and from the settlement of certain litigation, with
which it has purchased investment securities and which it expects to use to
finance its operations.

     The Company receives contract revenue and license and royalty revenue.
Contract revenue includes payments for research to support a specified number of
the Company's scientists and payments upon the achievement of specified research
and drug development milestones. Research contracts are generally conducted on a
best efforts basis. Contract revenue is recognized as the research is performed
using the percentage-of-completion method of accounting, primarily based on
contract costs incurred to date compared with total estimated costs at
completion. Revenues related to milestones are recognized upon the achievement
of the related milestone and when collection is probable. License revenue is
recognized when there is no material continuing performance obligation under the
agreement and collection is probable. Royalty revenue is recognized when earned
and collection is probable.

     Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect costs related to specific projects as well as fees paid to other
entities which conduct certain research activities on behalf of the Company.

     The Company has no products available for sale and does not expect to have
any products resulting from its research efforts, including its collaborations
with others, commercially available for at least several years, if at all.
Except for 1995, the Company has incurred net losses every year since shifting
its area of therapeutic focus to the central nervous system in 1991. The Company
is continuing to incur losses and expects to incur increasing operating losses
over the next several years as the Company's research and development
expenditures increase. The Company's revenue for the next several years will be
limited to payments under its collaborative relationships, license fees,
interest income and other miscellaneous income.

     During the years ended December 31, 1994, 1995 and 1996, the Company had
two, three and three collaborative research agreements that accounted for 89%,
81% and 97%, respectively, of total revenue.

      To date, the majority of the Company's expenditures have been for research
and development activities. SIBIA expects to receive royalties on sales of
Myotrophin, a product based on the insulin-like growth factor-1 ("IGF-1")
molecule being developed by Cephalon, Inc. ("Cephalon"), if it receives FDA
approval, although there can be no assurances that Myotrophin will receive such
approval. With the exception of Myotrophin, the Company does not expect to
receive royalties based upon net sales of drugs that may be developed for a
significant number of years, if at all. SIBIA expects research and development
expenses to increase significantly over the next several years as its discovery
and development programs progress. In addition, general and administrative
expenses necessary to support such expanded programs are also expected to
increase over the next several years.

     RESULTS OF OPERATIONS

     YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Total revenue decreased by 19%, from $10,448,000 in 1995 to $8,481,000 in
1996. The decrease was due primarily to the recognition, in 1995, of an up-front
license fee received from Bristol-Myers Squibb for an exclusive
commercialization license to use certain proprietary technologies related to
amyloid precursor protein, a one-time payment related to Cephalon, Inc.'s
buy-down of its royalty percentage due


                                       35
<PAGE>   36
on sales of an IGF-1 product within the neurology field, and revenue related to
Novartis' purchase of certain equipment. Such decrease was partially offset by a
net increase in 1996 contract revenue that was primarily attributable to the
Company's collaborative agreement with Bristol-Myers Squibb and reimbursement of
additional costs and fees from Novartis, pursuant to the terms of the extension
of a collaborative agreement.

     Total expenses increased by 42%, from $11,127,000 in 1995 to $15,829,000 in
1996. The increase in total expenses was primarily attributable to an increase
in research and development expenses of 37%, from $8,949,000 in 1995 to
$12,268,000 in 1996. This was a result of an increase in research and
development personnel and other costs related to the collaborative agreement
with Bristol-Myers Squibb, expanded programs in drug discovery, increased
outside preclinical expenses, occupancy costs, and compensation expense relating
to stock option grants. Partially offsetting the above increases was a decrease
in costs related to Novartis' purchase of certain equipment. General and
administrative expenses increased 63%, from $2,178,000 in 1995 to $3,561,000 in
1996. The increase in general and administrative expenses was primarily due to
increased 1996 legal fees related to various general and litigation matters,
increased 1996 compensation expense relating to stock option grants, increases
in salaries and fringe benefit expenses in 1996 due to an increased number of
employees, and other expenses related to being a publicly traded company.

     Other income decreased by 52%, from $3,680,000 in 1995 to $1,784,000 in
1996. The decrease in other income was due primarily to the net effect of
$3,146,000 of litigation settlements in 1995 and $1,834,000 of interest income
in 1996 related to investing of the proceeds of the Company's initial public
offering of Common Stock.

     As of December 31, 1996, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately
$20,730,000 and $700,000, respectively, which expire beginning in 2006 and 2002,
respectively. As of December 31, 1996, the Company had federal and state tax
credits for research activities totaling approximately $1,116,000 and $370,000,
respectively, which are available to offset future income taxes. The federal tax
credits expire during the years 2004 to 2010. The Company's ability to utilize
net operating loss carryforwards and tax credits is subject to limitations as
set forth in applicable federal and state tax laws. As specified in the Internal
Revenue Code, an ownership change of more than 50% by a combination of the
Company's significant stockholders during any three-year period would result in
certain limitations on the Company's ability to utilize its net operating loss
and tax credit carryforwards.

     YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     Total revenue increased by 115%, from $4,852,000 in 1994 to $10,448,000 in
1995. The increase was due primarily to the recognition, in 1995, of an up-front
license fee received from Bristol-Myers Squibb for an exclusive
commercialization license to use certain proprietary technologies related to
amyloid precursor protein, increased revenue related to a new collaborative
agreement with Bristol-Myers Squibb, a one-time payment related to Cephalon,
Inc.'s buy-down of its royalty percentage due on sales of an IGF-1 product
within the neurology field, and revenue related to Novartis' purchase of certain
equipment.

     Total expenses increased by 5%, from $10,580,000 in 1994 to $11,127,000 in
1995. The increase in total expenses was primarily attributable to an increase
in research and development expenses of 3%, from $8,663,000 in 1994 to
$8,949,000 in 1995, primarily due to an increase in preclinical development
expenses. General and administrative expenses increased 14%, from $1,917,000 in
1994 to $2,178,000 in 1995. The increase in general and administrative expenses
was primarily due to increased 1995 outside patent legal expenses.

     Other income decreased by 35%, from $5,701,000 in 1994 to $3,680,000 in
1995. The decrease in other income was due primarily to the net effect of a
$5,296,000 gain from the sale of the Company's


                                       36
<PAGE>   37
interest in the SISKA Diagnostics, Inc. joint venture in 1994 and $3,146,000 of
litigation settlements in 1995.

LIQUIDITY AND CAPITAL RESOURCES

     SIBIA has financed its operations primarily through equity financings,
research contracts (generally conducted on a best efforts basis), option,
license and royalty revenues. The Company has also received funds from the sale
of its interest in the SISKA Diagnostics, Inc. joint venture and the settlement
of certain litigation, with which it has invested in investment securities and
which it expects to use to finance its operations. Since 1991, the Company has
received approximately $41,775,000 in net proceeds from the sale of Convertible
Preferred Stock and Common Stock to investors and collaborative partners and
approximately $36,739,000 in contract, license and royalty revenue. The Company
is entitled to receive additional payments under the collaborative agreements in
the form of contract revenue, milestone payments, if milestones are achieved,
and royalties, if products are commercialized. As of December 31, 1996, the
Company had an accumulated deficit of $21,693,000.

     In 1996, the Company extended its agreement with Lilly, pursuant to which
the parties reduced the scope of development to be conducted under the agreement
and Lilly reduced its funding obligation. The Company expects that the reduced
development commitment will lead to a decrease in research and development
expenses which will be approximately equal to the reduction in funding from
Lilly.

     The Company anticipates that the cash, cash equivalents and investment
securities balance of $37,464,000 as of December 31, 1996 will be used to
support continued research and development of its technologies. The Company
leases laboratory and office facilities under an agreement expiring on December
31, 2001. The average minimum annual payment under the lease is approximately
$1,333,000, before consideration of sublease income. The Company believes that
its present facility will be adequate to conduct its research activities through
December 2001. Management believes that it should be able to secure additional
space at commercially reasonable rates if necessary. The Company has an option
to extend its lease for an additional five years. Since 1991, the Company has
invested $2,887,000 in property and equipment. Included within this amount is
$2,307,000 of equipment under capital leases. The net present value of
obligations under such capital leases as of December 31, 1996 was $1,071,000. In
addition, the Company has contracted for a fully automated functional high
throughput screening system and related equipment with an expected cost of
approximately $750,000, of which $500,000 was provided by Novartis (which may be
credited against future milestone payments).

      The Company expects to incur substantial research and development expenses
including continued increases in personnel costs and costs related to
preclinical testing and clinical trials, The Company's future capital needs will
be dependent upon many factors, including progress in its research and
development activities, the magnitude and scope of these activities, progress
with preclinical and clinical trials, the cost of preparing, filing,
prosecuting, maintaining, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in or terminations of existing collaborative arrangements, the
establishment of additional collaborative arrangements, and the cost of
manufacturing scale-up and development of marketing activities, if undertaken by
the Company. The Company intends to seek additional funding through research and
development relationships with suitable corporate collaborators or through
public or private financing. There can be no assurance that the Company will be
successful in its efforts to collaborate with additional partners or that
additional financing from other sources will be available on favorable terms, if
at all.

     The Company will require substantial additional funds to conduct the
research and development and preclinical and clinical testing of its compounds
and to manufacture and market any products that may be developed. Although the
Company plans to contract with third parties to manufacture and market any
products that may be developed, to the extent the Company is unsuccessful and is
required to establish its own manufacturing capacity or marketing program, it
will require substantial additional capital. The Company's future capital needs
will be dependent upon many factors, including progress in its research


                                       37
<PAGE>   38
and development activities, the magnitude and scope of these activities,
progress with preclinical and clinical trials, the cost of preparing, filing,
prosecuting, maintaining, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in or terminations of existing collaborative arrangements, the
establishment of additional collaborative arrangements, and the cost of
manufacturing scale-up and development of marketing activities, if undertaken by
the Company. The Company expects to expend substantial funds in connection with
research and development and in the area of intellectual property. Funds
generated from payments under existing collaborative agreements, together with
the Company's current cash reserves, will be insufficient to fund the Company's
operations through the completion of any clinical trials and commercialization
of its first product, if developed. Although the Company will seek to obtain
additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, there can be no assurance that additional financing will be available
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities, further dilution to then existing
stockholders would result. If adequate funds are not available, the Company may
be required to curtail significantly or eliminate one or more of its research,
discovery or development programs or obtain funds through additional
arrangements with corporate partners or others which may require the Company to
relinquish rights to certain of its technologies or product candidates that the
Company would not otherwise relinquish, which could have a material adverse
effect on the Company's business.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14, and are
incorporated herein by reference.

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

     Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The required information concerning Executive Officers of the Company is
contained in Item 1, Part I of this Report.

     The information required by this item (with respect to Directors) is
incorporated by reference to the information under the caption "Election of
Directors" contained in the Company's definitive Proxy Statement to be filed
with the Commission pursuant to Regulation 14A in connection with the Company's
1997 Annual Meeting of Stockholders to be held on June 4, 1997 (the "Proxy
Statement").

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


                                       38
<PAGE>   39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                    PART IV

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

            (a)         (1)         FINANCIAL STATEMENTS

                                    Index to financial statements appears on
                                    page F-1.

                        (2)         FINANCIAL STATEMENT SCHEDULES

                                    None required.

            (b)         REPORTS ON FORM 8-K

     On March 31, 1997, the Company filed a current report on Form 8-K which
disclosed certain information under Item 5.


                                       39
<PAGE>   40
            (c)         EXHIBITS

EXHIBIT
NUMBER                         DESCRIPTION OF DOCUMENT
------                         -----------------------

3.1         Amended and Restated Certificate of Incorporation of the Registrant.
            (1)

3.2         Amended and Restated Bylaws of the Registrant. (1)

3.3         Registrant's Certificate of Designation of Series A Junior
            Participating Preferred Stock (2)

4.1         Reference is made to Exhibits 3.1, 3.2 and 3.3.

4.2         Specimen stock certificate. (1)

10.1        Form of Indemnification Agreement entered into between Registrant
            and its directors and officers. (1)

10.2        Registrants 1981 Employee Stock Option Plan. (1)

10.3        Form of Employee Incentive Stock Option Agreement under the 1981
            Employee Stock Option Plan. (1)

10.4        Registrant's 1981 Consultant Stock Option Plan. (1)

10.5        Form of Consultant Nonstatutory Stock Option Agreement. (1)

10.6        Registrant's 1992 Stock Option and Restricted Stock Plan, as amended
            (the "1992 Option Plan"). (1)

10.7        Form of Incentive Stock Option Agreement under the 1992 Option Plan.
            (1)

10.8        Form of Nonstatutory Stock Option Agreement under the 1992 Option
            Plan. (1)

10.9        Registrant's 1996 Equity Incentive Plan (the "1996 Equity Plan").
            (1)

10.10       Form of Incentive Stock Option Agreement under the 1996 Equity Plan.
            (1)

10.11       Form of Nonstatutory Stock Option Agreement under the 1996 Equity
            Plan. (1)

10.12       Registrant's 1996 Non-Employee Directors' Stock Option Plan (the
            "Non-Employee Directors' Option Plan"). (1)

10.13       Form of Nonstatutory Stock Option Agreement under the Non-Employee
            Directors' Option Plan. (1)

10.14       Registrant's Employee Stock Purchase Plan and related offering
            document. (1)

10.15       Registrant's Management Change of Control Plan, as amended (the
            "Change of Control Plan"). (1)

10.16       Form of Nonqualified Stock Option Agreement under the Change of
            Control Plan. (1)

10.17       Lease Agreement dated April 7, 1989 between Registrant and Regency
            Associates, Limited, as subsequently amended on March 1, 1993, and
            July 1, 1995. (1)

10.18       Equipment Lease Line Agreement dated June 30, 1992 between
            Registrant and GE Capital, as amended. (1)

10.19       Investment Agreement dated August 10, 1995 between Registrant and
            Bristol-Myers Squibb Company. (1)

10.20       Collaborative Research and License Agreement dated August 10, 1995
            between Registrant and Bristol-Myers Squibb Company. (1)

10.21       Stockholders Agreement dated as of October 1, 1991, by and among
            Registrant, Phillips Petroleum Company, The Salk Institute for
            Biological Studies, Skandigen AB and the Stockholders of Protease
            Corporation. (1)

10.22       License Agreement dated March 8, 1988 between Registrant and The
            Salk Institute for Biological Studies, as amended by that certain
            First Amendment to License Agreement dated March 10, 1996. (1)

10.23       License Agreement dated December 15, 1990 between Registrant and The
            Salk Institute for Biological Studies, as amended by that certain
            First Amendment to License Agreement dated March 10, 1996. (1)

10.24       Stock Purchase and Stockholders Agreement dated April 11, 1988 among
            Registrant, Phillips Petroleum Company, The Salk Institute for
            Biological Studies and Skandigen AB, as amended by that certain
            Amendment to Stock Purchase and Shareholders Agreement dated April
            12, 1990. (1)


                                       40
<PAGE>   41
Exhibit
Number                        Description of Document
------                        -----------------------

10.25       Agreement dated December 20, 1991 between Registrant, Phillips
            Petroleum Company, The Salk Institute for Biological Studies and
            Skandigen AB. (1)

10.26       License Agreement dated December 20, 1991 between Registrant and
            Phillips Petroleum Company. (1)

10.27       Amended and Restated Research and Development and License Agreement
            dated March 20, 1996 between Registrant and CIBA-GEIGY Limited. (1)

10.28       Stock Purchase Agreement dated September 15, 1992 between Registrant
            and CIBA-GEIGY Limited. (1)

10.29       Subscription Agreement dated April 11, 1994 between Registrant and
            CIBA-GEIGY Limited. (1)

10.30       Stock Purchase Agreement dated March 20, 1996 between Registrant and
            CIBA-GEIGY Limited. (1)

10.31       Agreement dated May 1, 1992 between Registrant and Eli Lilly and
            Company, as amended and extended by that certain Extension Agreement
            dated May 1, 1995. (1)

10.32       Stock Purchase Agreement dated May 7, 1992 between Registrant and
            Eli Lilly and Company. (1)

10.33       Option and License Agreement dated April 30, 1995 between Registrant
            and Eli Lilly and Company. (1)

10.34       License Agreement dated March 5, 1992 between Registrant and
            Cephalon, Inc., as amended by that certain Letter dated March 22,
            1995. (1)

10.35       Patent License Agreement dated June 21, 1993 between Registrant and
            Affymax Technologies, N.V., as amended by that certain Letter dated
            July 15, 1993. (1)

10.36       Agreement dated October 1, 1993 between Registrant and Hafslund
            Nycomed Pharma AG. (1)

10.37       Development and License Agreement dated February 28, 1997 between
            Registrant and Meiji Seika Kaisha, Ltd. (3)

10.38       Further Extension Agreement dated November 1, 1996 between
            Registrant and Eli Lilly and Company (3)

10.39       Third Amendment to Lease dated December 31, 1996 between Registrant
            and Regency Properties, L.P. (3)

10.40       Equipment Lease Line Agreement dated March 4, 1997 between
            Registrant and G.E. Capital.

10.41       Rights Agreement dated as of March 17, 1997 among Registrant and
            ChaseMellon Shareholders Services, L.L.C. (2)

10.42       Specimen Rights Certificate (2)

11.1        Computation of net income per share.

23.1        Consent of Price Waterhouse LLP.

24.1        Power of Attorney. Reference is made to page 42.

27.1        Financial Data Schedule
----------------------------------------------

(1)    Filed as an exhibit to Registrant's Registration Statement on Form S-1
       (No. 333-2586) or amendments thereto and incorporated herein by
       reference.

(2)    Filed as an exhibit to Registrant's current report on Form 8-K filed with
       the Commission on March 31, 1997.

(3)    Confidential treatment has been requested with respect to certain
       portions of this exhibit. Omitted portions have been filed separately
       with the Securities and Exchange Commission.


                                       41
<PAGE>   42
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.

     Date: March 28, 1997         SIBIA Neurosciences, Inc.
                              By: /s/ Thomas A. Reed
                                  ---------------------------------------------
                                  Thomas A. Reed
                                  Vice President, Finance/Administration, & CFO

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William T. Comer and Thomas A. Reed, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
resubstitute, may lawfully do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
            SIGNATURE                                       TITLE                                     DATE
            ---------                                       -----                                     ----
<S>                                             <C>                                              <C>

/s/William T. Comer
----------------------------------              President, Chief Executive Office                March 25, 1997
William T. Comer, Ph.D.                         and Director(Principal Executive Officer)

/s/Thomas A. Reed
----------------------------------              Vice President, Finance/                         March 28, 1997
Thomas A. Reed                                  Administration and Chief Financial Officer
                                                (Principal Financial and Accounting Officer)

/s/William R. Miller
----------------------------------               Chairman of the Board                           March 26, 1997
William R. Miller

/s/Stanley T. Crooke
----------------------------------               Director                                        March 26, 1997
Stanley T. Crooke, MD, Ph.D.

/s/Francis H.C. Crick
----------------------------------               Director                                        March 27, 1997
Francis H.C. Crick, Ph.D.

/s/Frederick B. Rentschler
----------------------------------               Director                                        March 26, 1997
Frederick B. Rentschler

/s/James D. Watson
----------------------------------               Director                                        March 26, 1997
James D. Watson, Ph.D.
</TABLE>


                                       42
<PAGE>   43



                           SIBIA NEUROSCIENCES, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
 <S>                                                                                           <C>
 Report of Independent Accountants                                                             F-2

 Balance Sheet as of December 31, 1995 and 1996                                                F-3

 Statement of Operations for the years ended
   December 31, 1994, 1995 and 1996                                                            F-4

 Statement of Stockholders' Equity for the years
   ended December 31, 1994, 1995 and 1996                                                      F-5

 Statement of Cash Flows for the years ended
   December 31, 1994, 1995 and 1996                                                            F-6

 Notes to Financial Statements                                                                 F-7
</TABLE>





                                     F-1
<PAGE>   44

                       REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and
  Stockholders of SIBIA Neurosciences, Inc.

  In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of SIBIA
Neurosciences, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.




/s/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP
San Diego, California
February 28, 1997





                                     F-2
<PAGE>   45
                           SIBIA NEUROSCIENCES, INC.

                                 BALANCE SHEET



<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                             ------------
                                                                     1995                     1996
                                                                     ----                     ----
<S>                                                              <C>                      <C>
ASSETS
Current assets:
  Cash and cash equivalents                                      $  2,274,000             $  1,412,000
  Investment securities                                            14,214,000               36,052,000
  Contract and accounts receivable                                     35,000                   68,000
  Prepaid expenses and other current assets                           238,000                  684,000
                                                                 ------------             ------------
     Total current assets                                          16,761,000               38,216,000
Property and equipment, net                                         1,387,000                1,307,000
Other assets                                                          103,000                  460,000
                                                                 ------------             ------------
                                                                 $ 18,251,000             $ 39,983,000
                                                                 ============             ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                 $1,006,000               $1,212,000
  Accrued liabilities                                               1,167,000                1,249,000
  Deferred revenue                                                    250,000                  431,000
                                                                 ------------             ------------
     Total current liabilities                                      2,423,000                2,892,000
Capital lease obligations                                             721,000                  519,000
Commitments and contingencies (Note 11)
Stockholders' equity:
  Preferred Stock, $.001 par value; 5,000,000
     shares authorized (Note 9):
     Series A Convertible Preferred Stock
     Series B Convertible Preferred Stock
     Series C Convertible Preferred Stock
  Common Stock, $.001 par value; 25,000,000 shares
     authorized; 4,899,884 and 9,154,157 shares issued
     and outstanding at December 31, 1995 and 1996,
     respectively                                                       5,000                    9,000
  Additional paid-in capital                                       31,869,000               59,746,000
  Deferred compensation                                              (635,000)              (1,039,000)
  Notes receivable from stockholders                                  (82,000)                (640,000)
  Net unrealized gain on investment securities
     available-for-sale                                                79,000                  189,000
  Accumulated deficit                                             (16,129,000)             (21,693,000)
                                                                 ------------             ------------
     Total stockholders' equity                                    15,107,000               36,572,000
                                                                 ------------             ------------
                                                                 $ 18,251,000             $ 39,983,000
                                                                 ============             ============
</TABLE>





                See accompanying notes to financial statements.





                                     F-3
<PAGE>   46

                           SIBIA NEUROSCIENCES, INC.

                            STATEMENT OF OPERATIONS



<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                          ------------------------
                                                              1994                 1995                  1996
                                                              ----                 ----                  ----
<S>                                                        <C>                  <C>                   <C>
Revenue:
  Contract                                                 $ 4,454,000          $ 5,563,000           $ 8,215,000
  License and royalty                                          398,000            4,885,000               266,000
                                                           -----------          -----------           -----------
     Total revenue (including $2,691,000,
       $4,139,000 and $6,606,000 in related-party
       revenue for 1994, 1995 and 1996, respectively)        4,852,000           10,448,000             8,481,000
                                                           -----------          -----------           -----------
Expenses:
  Research and development                                   8,663,000            8,949,000            12,268,000
  General and administrative                                 1,917,000            2,178,000             3,561,000
                                                           -----------          -----------           -----------
                                                            10,580,000           11,127,000            15,829,000
                                                           -----------          -----------           -----------
                                                            (5,728,000)            (679,000)           (7,348,000)
                                                           -----------          -----------           -----------
Other income (expense):
  Settlement of litigation                                                        3,146,000
  Gain from sale of joint venture                            5,296,000
  Interest income                                              424,000              567,000             1,834,000
  Interest expense                                             (63,000)             (71,000)              (68,000)
  Other                                                         44,000               38,000                18,000
                                                           -----------          -----------           -----------
                                                             5,701,000            3,680,000             1,784,000
                                                           -----------          -----------           -----------
Income (loss) before provision for income
  taxes                                                        (27,000)           3,001,000            (5,564,000)
Provision for income taxes                                                           75,000
                                                           -----------          -----------           -----------
Net income (loss)                                          $   (27,000)         $ 2,926,000           $(5,564,000)
                                                           ===========          ===========           ===========
Net income (loss) per share                                                            $.42                $(0.73)
                                                                                ===========           ===========

Weighted average number of common and
  common equivalent shares outstanding                                            6,928,323             7,596,380
                                                                                ===========           ===========
</TABLE>





                See accompanying notes to financial statements.





                                     F-4
<PAGE>   47

                           SIBIA NEUROSCIENCES, INC.

                       STATEMENT OF STOCKHOLDERS' EQUITY




<TABLE>
<CAPTION>


                                       SERIES A, B AND C
                                          CONVERTIBLE
                                        PREFERRED STOCK            COMMON STOCK
                                        ---------------            ------------            ADDITIONAL
                                      SHARES                    SHARES                      PAID-IN
                                    OUTSTANDING    AMOUNT     OUTSTANDING     AMOUNT        CAPITAL
                                    -----------    ------     -----------     ------      -----------
<S>                                  <C>           <C>         <C>            <C>         <C>
Balance as of
  December 31, 1993                    24,450                  4,839,019      $5,000      $21,733,000
Net unrealized gain on investment
  securities available-for-sale
  at January 1, 1994
Issuance of Common Stock                                          23,500                       10,000
Issuance of Series A Convertible
  Preferred Stock                     173,611                                               2,500,000
Stock option compensation expense                                                             217,000
Stock cancellations - Series B
  Convertible Preferred Stock          (1,550)                                                 (6,000)
Payment on notes receivable
Exercise of stock options                                         13,865                        7,000
Net decrease in unrealized
  gain on investment
  securities available-for-sale
Net loss
                                     --------      ------      ---------      ------      -----------
Balance as of
  December 31, 1994                   196,511                  4,876,384       5,000       24,461,000
Issuance of Series C
  Convertible Preferred Stock         280,000                                               6,930,000
Stock option compensation expense                                                             461,000
Stock cancellations - Series B
  Convertible Preferred Stock            (300)                                                 (2,000)
Exercise of stock options                                         23,500                       19,000
Net increase in unrealized
  gain on investment
  securities available-for-sale
Net income
                                     --------      ------      ---------      ------      -----------
Balance as of
  December 31, 1995                   476,211                  4,899,884       5,000       31,869,000
Issuance of Common Stock                                       2,554,545       3,000       25,842,000
Stock option compensation expense                                                           1,167,000
Exercise of stock options             120,200                    288,765                      815,000
Stock purchase plan                                                9,408                       54,000
Payments on notes receivable
Conversion of Preferred Stock        (596,411)                 1,401,566       1,000           (1,000)
Net increase in unrealized
  gain on investment securities
  available-for-sale
Cancellation of partial shares                                       (11)
Net Loss
                                     --------      ------      ---------      ------      -----------
Balance as of
  December 31, 1996                                            9,154,157      $9,000      $59,746,000
                                     ========      ======      =========      ======      ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                  NET UNREALIZED
                                                                     GAIN ON
                                                      NOTES         INVESTMENT
                                                    RECEIVABLE      SECURITIES                        TOTAL
                                      DEFERRED         FROM         AVAILABLE-     ACCUMULATED     STOCKHOLDERS'
                                    COMPENSATION    STOCKHOLDERS    FOR-SALE         DEFICIT          EQUITY
                                    -----------      ---------      ---------      ------------     -----------
<S>                                 <C>              <C>            <C>            <C>              <C>
Balance as of
  December 31, 1993                    $(22,000)     $(100,000)                    $(19,028,000)     $2,588,000
Net unrealized gain on investment
  securities available-for-sale
  at January 1, 1994                                                 $219,000                           219,000
Issuance of Common Stock                                                                                 10,000
Issuance of Series A Convertible
  Preferred Stock                                                                                     2,500,000
Stock option compensation expense      (201,000)                                                         16,000
Stock cancellations - Series B
  Convertible Preferred Stock                            5,000                                           (1,000)
Payment on notes receivable                             11,000                                           11,000
Exercise of stock options                                                                                 7,000
Net decrease in unrealized
  gain on investment
  securities available-for-sale                                      (157,000)                         (157,000)
Net loss                                                                                (27,000)        (27,000)
                                    -----------      ---------      ---------      ------------     -----------
Balance as of
  December 31, 1994                    (223,000)       (84,000)        62,000       (19,055,000)      5,166,000
Issuance of Series C
  Convertible Preferred Stock                                                                         6,930,000
Stock option compensation expense      (412,000)                                                         49,000
Stock cancellations - Series B
  Convertible Preferred Stock                            2,000
Exercise of stock options                                                                                19,000
Net increase in unrealized
  gain on investment
  securities available-for-sale                                        17,000                            17,000
Net income                                                                            2,926,000       2,926,000
                                    -----------      ---------      ---------      ------------     -----------
Balance as of
  December 31, 1995                    (635,000)       (82,000)        79,000       (16,129,000)     15,107,000
Issuance of Common Stock                                                                             25,845,000
Stock option compensation expense      (404,000)                                                        763,000
Exercise of stock options                             (593,000)                                         222,000
Stock purchase plan                                                                                      54,000
Payments on notes receivable                            35,000                                           35,000
Conversion of Preferred Stock
Net increase in unrealized
  gain on investment securities
  available-for-sale                                                  110,000                           110,000
Cancellation of partial shares
Net Loss                                                                             (5,564,000)     (5,564,000)
                                    -----------      ---------      ---------      ------------     -----------
Balance as of
  December 31, 1996                 $(1,039,000)     $(640,000)      $189,000      $(21,693,000)    $36,572,000
                                    ===========      =========      =========      ============     ===========
</TABLE>



                See accompanying notes to financial statements.

                                     F-5
<PAGE>   48
                           SIBIA NEUROSCIENCES, INC.

                            STATEMENT OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                                        ------------------------
                                                               1994               1995              1996
                                                               ----               ----              ----
 <S>                                                       <C>                <C>               <C>
 Cash flows from operating activities:
  Net income (loss)                                        $    (27,000)      $  2,926,000      $ (5,564,000)
   Adjustments to reconcile net income (loss) to
     net cash provided (used) by operating
     activities:
   Gain on sale of corporate joint venture                   (5,296,000)
   Depreciation and amortization                                449,000            497,000           598,000
   Compensation from issuance of
     common stock options                                        16,000             49,000           763,000
   Gain on disposal of property                                 (44,000)           (37,000)           (1,000)
   Net amortization of premium and discount
     on investment securities                                  (261,000)          (271,000)         (447,000)
   Increase (decrease) in cash resulting from
     changes in:
       Contract and accounts receivable                         (52,000)           201,000           (33,000)
       Prepaid expenses and other assets                        (18,000)            47,000          (813,000)
       Accounts payable and accrued liabilities                (102,000)           271,000           237,000
       Deferred revenue                                      (1,038,000)            76,000           181,000
                                                           ------------       ------------      ------------
          Net cash provided (used) by operating
            activities                                       (6,373,000)         3,759,000        (5,079,000)
                                                           ------------       ------------      ------------
 Cash flows from investing activities:
   Purchases of investment securities held-to-
     maturity                                               (10,685,000)       (17,312,000)
   Maturities of investment securities held-to-
     maturity                                                 7,370,000          7,295,000        13,992,000
   Purchase of investment securities available-for-
     sale                                                                                        (42,624,000)
   Maturities of investment securities
     available-for-sale                                                                            7,300,000
   Principal payments received on investment
     securities available-for-sale                            1,167,000             88,000            51,000
   Proceeds from sale of corporate joint venture              5,196,000
   Proceeds from disposal of property and
     equipment                                                   52,000             44,000             5,000
   Acquisition of property and equipment                        (79,000)          (120,000)         (182,000)
                                                           ------------       ------------      ------------
          Net cash provided (used) by investing
            activities                                        3,021,000        (10,005,000)      (21,458,000)
                                                           ------------       ------------      ------------
 Cash flows from financing activities:
   Proceeds from payments on notes receivable                    11,000                               35,000
   Proceeds from issuance of stock                            2,507,000          6,949,000        26,121,000
   Principal payments on capital lease obligations             (276,000)          (377,000)         (481,000)
                                                           ------------       ------------      ------------
          Net cash provided by financing activities           2,242,000          6,572,000        25,675,000
                                                           ------------       ------------      ------------

 Net increase (decrease) in cash and cash
   equivalents                                               (1,110,000)           326,000          (862,000)
 Cash and cash equivalents at beginning of year               3,058,000          1,948,000         2,274,000
                                                           ------------       ------------      ------------
 Cash and cash equivalents at end of year                  $  1,948,000       $  2,274,000      $  1,412,000
                                                           ============       ============      ============
 Supplemental Information:
   Income taxes paid -- Note 8
   Interest paid -- Note 11
   Equipment under capital leases -- Note 11
</TABLE>





                See accompanying notes to financial statements.





                                     F-6
<PAGE>   49
                           SIBIA NEUROSCIENCES, INC.

                         NOTES TO FINANCIAL STATEMENTS


NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

  SIBIA Neurosciences, Inc., formerly the Salk Institute
Biotechnology/Industrial Associates Inc. (the "Company" or "SIBIA"), was
founded by The Salk Institute for Biological Studies ("The Salk Institute") and
incorporated in Delaware in 1981. SIBIA is engaged in the discovery and
development of novel, small molecule therapeutics for nervous system disorders
based on its unique approach to characterizing the molecular processes involved
in such disorders. SIBIA is focusing its efforts on developing compounds for
the treatment of Parkinson's disease, Alzheimer's disease, stroke, head trauma,
epilepsy, chronic pain, schizophrenia and other disorders.

  The Company has been funded to date principally through equity financings,
research contracts (generally conducted on a best efforts basis), option,
license and royalty revenues. The Company has also received income from the
sale of its interest in a joint venture (Note 6) and from the settlement of
certain litigation (Note 7).

SIGNIFICANT OWNERSHIP

  The Salk Institute owned 37%, 33% and 22% of the Company's outstanding Common
Stock as of December 31, 1994, 1995 and 1996, respectively.  Skandigen AB owned
18%, 16% and 11% of the Company's outstanding Common Stock as of December 31,
1994, 1995 and 1996, respectively.  Novartis AG, formerly CIBA-GEIGY Limited,
owned 11% of the Company's outstanding Common Stock as of December 31, 1996.

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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

  It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their fair value.

CONCENTRATION OF RISK

  Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents and investment
securities. The Company invests in high-grade debt instruments. No significant
losses have been incurred related to these investments.

  During the years ended December 31, 1994, 1995 and 1996, the Company had two,
three and three collaborative research agreements that accounted for 89%, 81%
and 97%, respectively, of total revenue (Note 4).





                                     F-7
<PAGE>   50
COLLABORATIVE AGREEMENTS

  The Company enters into collaborative agreements from time to time with third
parties. Such agreements may call for an equity investment by the collaborative
partner as well as a commitment for current and future research funding in
exchange for best efforts research to be provided by the Company. The
collaborative agreements may also provide for license fees, milestone payments
and royalties. Such agreements define the rights of each party related to the
results of such research. The amounts recognized by the Company related to
equity investments are recorded at the fair market value, per share, of the
Company's securities. Amounts related to research funding and license and
royalty rights are recognized in accordance with the specific terms of each
collaborative agreement to the extent the Company determines that such
recognition is consistent with the substance of the agreement. (Note 4).

REVENUE RECOGNITION

  Contract revenue is recognized as the research is performed using the
percentage-of-completion method of accounting, primarily based on contract
costs incurred to date compared with total estimated costs at completion.
Revenue related to milestones is recognized upon the achievement of the related
milestone and when collection is probable. License revenue is recognized when
there is no material continuing performance obligation under the agreement and
collection is probable. Royalty revenue is recognized when earned and
collection is probable.

RESEARCH AND DEVELOPMENT COSTS

  Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect internal costs related to specific projects as well as fees paid to
other entities which conduct certain research activities on behalf of the
Company.

CASH EQUIVALENTS

  Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less.  As of December 31, 1995, $2,000,000 of the
$2,274,000 total cash and cash equivalents was invested in certificates of
deposit that are carried at cost.  As of December 31, 1996, $932,000 of the
$1,412,000 total cash and cash equivalents was invested in money market funds.

INVESTMENT SECURITIES

  Management determines the appropriate classification of its investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company has classified its investment securities as
"available-for-sale" or "held-to-maturity".  Available-for-sale securities are
recorded at fair value with the corresponding unrealized gain or loss reflected
as a component of stockholders' equity.  Held-to-maturity securities are
recorded at amortized cost.  Actual gains or losses, if any, on
available-for-sale securities are reflected in the statement of operations when
the underlying securities are sold.

PROPERTY AND EQUIPMENT

  Property and equipment is recorded at cost and depreciated over estimated
useful lives of 4 to 8 years using the straight-line method.  Property and
equipment acquired under capital leases is amortized over the shorter of the
useful life or the related lease terms using the straight-line method.





                                     F-8
<PAGE>   51
LONG-LIVED ASSETS

  The Company assesses potential impairments to its long-lived assets, on an
exception basis, when there is evidence that events or changes in circumstances
have made recovery of the asset's carrying value unlikely. An impairment loss
would be recognized when the sum of the expected future net cash flows is less
than the carrying amount of the asset. No such impairment losses have been
recorded by the Company.

INCOME TAXES

  Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities.  The
Company establishes a valuation allowance, if necessary, to reflect the
likelihood of realization of net deferred tax assets.  Deferred income tax
expense is the change during the year in the deferred income tax asset or
liability.

NET INCOME (LOSS) PER SHARE

  Net income per share is computed pursuant to the treasury stock method using
the weighted average number of common and common equivalent shares outstanding
during the period. All equity securities issued by the Company during the
twelve months preceding the initial public offering date at prices below the
offering price have been included in the calculation of weighted average shares
outstanding for the year ended December 31, 1995.  The net income per share in
1995 includes the effect of the Company's Convertible Preferred Stock that was
convertible at the option of the holder or automatically in the event of an
initial public offering.  Earnings per share in 1994 is not presented because
such amounts are not believed to be meaningful. All Common Stock share and per
share information has been adjusted for the 2.35-for-1 stock split of the
outstanding shares of Common Stock for all periods presented (Note 9).


NOTE 2 -- INVESTMENT SECURITIES

  The Company's investment securities as of December 31, 1995 and 1996 consist
primarily of United States government and mortgage-backed securities.  These
investment securities were classified as available-for-sale and
held-to-maturity as follows:

<TABLE>
<CAPTION>
                                 DECEMBER 31, 1995                                DECEMBER 31, 1996
                                 -----------------                                -----------------
                               ESTIMATED     GROSS      GROSS                   ESTIMATED     GROSS        GROSS
                                 FAIR     UNREALIZED  UNREALIZED                  FAIR      UNREALIZED   UNREALIZED
                     COST       VALUE       GAINS       LOSSES        COST        VALUE       GAINS        LOSSES
                     ----       -----       -----      -------        ----        -----       -----        ------
<S>              <C>          <C>          <C>         <C>         <C>          <C>          <C>           <C>
Available-for-
sale
  Investment
    securities   $   343,000  $  422,000   $84,000     $5,000      $35,863,000  $36,052,000  $198,000      $9,000
                 ===========  ==========   =======     ======      ===========  ===========  ========      ======
Held-to-
maturity
  Investment
    securities   $13,792,000 $13,788,000   $ 1,000     $5,000
                 ===========  ==========   =======     ======

</TABLE>

  The amortized cost and estimated fair value of the debt securities as of
December 31, 1996 by contractual maturity, are shown below. Actual maturities
may differ from the contractual maturities as the issuers of the securities may
have the right to call the obligation.

<TABLE>
<CAPTION>
                                                                      ESTIMATED
                                                          COST        FAIR VALUE
                                                          ----        ----------
<S>                                                   <C>            <C>
Available-for-sale
  Due in one year or less                             $14,493,000     $14,510,000
                                                      ===========     ===========
  Due in one to five years                            $21,075,000     $21,174,000
                                                      ===========     ===========
  Due after ten years                                 $   295,000     $   368,000
                                                      ===========     ===========
</TABLE>





                                      F-9
<PAGE>   52
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                       ------------
                                                                   1995          1996
                                                                   ----          ----
        <S>                                                    <C>            <C>
        PROPERTY AND EQUIPMENT
          Lab equipment                                        $ 3,690,000    $ 3,708,000
          Computer equipment                                       265,000        284,000
          Other                                                     85,000        108,000
                                                               -----------    -----------
                                                                 4,040,000      4,100,000
          Accumulated depreciation and amortization             (2,653,000)    (2,793,000)
                                                               -----------    -----------
                                                               $ 1,387,000    $ 1,307,000
                                                               ===========    ===========

                                                                      DECEMBER 31,
                                                                      ------------
                                                                  1995           1996
                                                                  ----           ----
        ACCRUED LIABILITIES
          Capital leases obligations, current portion           $  431,000     $  482,000
          Accrued vacation                                         264,000        288,000
          Accrued bonuses                                          202,000        183,000
          Other                                                    270,000        296,000
                                                                ----------     ----------
                                                                $1,167,000     $1,249,000
                                                                ==========     ==========
</TABLE>



NOTE 4 -- SIGNIFICANT COLLABORATIVE AGREEMENTS

ELI LILLY & COMPANY

  In May 1992, the Company entered into a three-year agreement with Eli Lilly &
Company ("Lilly") providing for the discovery and development of drugs which
specifically interact with human neuronal calcium channels. In January 1997,
the agreement was revised and extended to October 31, 1998.  Under the terms of
the extended agreement, Lilly will provide research funding for the
identification and characterization of a new VGCC subtype for use in the
discovery of drugs for central nervous system disorders.  In exchange for
providing a certain level of scientific research under the agreement, the
Company will receive payments from Lilly; additional payments may be received
by the Company upon the achievement of certain development milestones and the
Company may receive royalties in the event there are sales of products
containing a compound developed under the agreement.  The Company has granted
Lilly an exclusive license to use certain proprietary technology of the Company
during the term of the agreement, and non-exclusively thereafter.  Either party
may terminate the current agreement upon three months advance written notice
provided anytime after August 1, 1997.  As part of the original agreement,
Lilly purchased 276,470 shares of Common Stock. The Company recognized contract
revenue related to this agreement of $1,621,000, $1,663,000 and $1,609,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.

NOVARTIS AG (FORMERLY CIBA-GEIGY LIMITED)

  In October 1992, the Company entered into a three-year agreement with
Novartis AG ("Novartis") relating to the development and use of mammalian cell
lines expressing excitatory amino acid receptor ("EAAR") subtypes for the
discovery of chemical agents which react with specific EAAR subtypes.  During
March 1994, pursuant to the agreement, Novartis purchased 173,611 shares of
Series A Convertible Preferred Stock (Note 9).  In March 1996, the Company
executed an agreement with Novartis to extend the term of its collaborative
agreement to September 1998, unless extended by mutual consent or terminated by
either party upon six months' notice, which may be provided after September
1997. In exchange for providing a certain level of scientific research under
the agreement, the Company will receive payments from Novartis; additional
payments may be received by the Company upon the achievement of certain
development milestones and the Company may receive royalties in the event there
are sales of products containing a compound developed under the agreement. As
part of the agreement, Novartis agreed to make a further equity investment in
shares of the Company's Common Stock of $7,500,000, of which $5,000,000 was
made in conjunction with the initial public offering of the Company's Common
Stock and the remaining $2,500,000 will be made upon the achievement of certain
research milestones. Novartis has also





                                     F-10
<PAGE>   53
paid the Company $500,000 to fund certain capital expenditures, which may be
credited against future milestone payments.  Upon expiration or termination of
the agreement, each party will continue to have a non-exclusive right to use
technology developed and, for a period of three years after the agreement,
Novartis will have a right of first negotiation related to any compounds
developed from the technology related to the agreement. The Company recognized
contract revenue related to this agreement of $2,691,000, $2,281,000 and
$3,383,000 for the years ended December 31, 1994, 1995 and 1996, respectively.

BRISTOL-MYERS SQUIBB COMPANY

  In August 1995, the Company entered into a four-year collaborative agreement
with Bristol-Myers Squibb Company ("Bristol-Myers Squibb") relating to the
discovery and development of compounds relating to amyloid precusor protein.
The collaborative effort includes identifying compounds that are suitable for
development into products for commercialization and to conduct preclinical
development and clinical trials for such compounds. In exchange for providing a
certain level of scientific research under the agreement, the Company will
receive payments from Bristol-Myers Squibb; additional payments may be received
by the Company upon the achievement of certain development milestones.
Bristol-Myers Squibb will also pay royalties based on the level of its net
sales of products, if any, developed under the agreement. The Company
recognized contract revenue related to this agreement of $1,169,000 and
$3,223,000 in 1995 and 1996, respectively.

  Concurrent with the execution of the agreement, Bristol-Myers Squibb paid a
non-refundable $3,000,000 license fee for an exclusive commercialization
license to use certain related existing proprietary technologies and purchased
280,000 shares of the Company's Series C Convertible Preferred Stock (Note 9).
Bristol-Myers Squibb also agreed to make an additional equity investment of
$6,000,000 in shares of Common Stock upon the initiation of clinical trials
relating to any product developed from the collaboration but not before January
1, 1997.

  Total costs incurred under the Company's various collaborative agreements for
the years ended December 31, 1994, 1995 and 1996, including certain
administrative costs, aggregated $3,232,000, $4,381,000 and $5,671,000,
respectively.


NOTE 5 -- SIGNIFICANT OPTION AND LICENSE AGREEMENTS

THE SALK INSTITUTE

  In 1988, SIBIA entered into a license agreement with The Salk Institute
covering a number of NAChR receptor subunit clones. This agreement was amended
in March 1996 such that the license became an exclusive worldwide license.
Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to
The Salk Institute on sales of products resulting from The Salk Institute's
NAChR technology. In addition, the Company is required to make certain minimum
annual royalty payments to The Salk Institute beginning in 2002. Failure to pay
such royalties will result in the related license becoming non-exclusive.

  In 1990, SIBIA entered into a three-year agreement with The Salk Institute in
the area of EAARs. This agreement provided for the support of certain research
in 1992 and 1993 at The Salk Institute by SIBIA and the transfer of research
materials and research results in the EAAR area from The Salk Institute to
SIBIA. SIBIA also received an exclusive worldwide license to certain
EAAR-related patents and patent applications held by The Salk Institute. The
agreement was amended in March 1996. Pursuant to the agreement, as amended,
SIBIA is required to make certain annual minimum royalty payments to The Salk
Institute beginning in 2002. Failure to pay such royalties will result in the
related license agreement becoming non-exclusive.





                                     F-11
<PAGE>   54
CEPHALON, INC.

  In October 1991, the Company entered into a development and option-to-license
agreement with Cephalon, Inc. ("Cephalon") for certain proprietary technology
related to the development and production of recombinant insulin-like growth
factor ("IGF-1"), known as Myotrophin, on a commercial basis for certain
applications.  The option-to-license was subsequently expanded to include
additional applications.  All options- to-license the IGF-1 technology were
exercised and the license agreements, as executed, include a provision for the
payment of licensing fees upon the occurrence of certain development milestones
and royalties on the sales of products using licensed technology.  In 1995, the
Company received a non-refundable payment of $1,750,000 from Cephalon to reduce
the royalty percentage on sales of an IGF-1 product within the neurology field.


NOTE 6 -- SALE OF JOINT VENTURE

  In February 1984, the Company received 1,000,000 shares of Common Stock of
SISKA Diagnostics, Inc. ("SISKA"), a corporation formed in 1984, in exchange
for the assignment of rights to certain inventions in the field of nucleic acid
probe diagnostics. The Company's investment in the SISKA corporate joint
venture, accounted for under the equity method of accounting, was assigned no
value as the intangible assets exchanged had no recorded value. The remaining
1,000,000 shares of SISKA Common Stock outstanding was owned by Skandigen AB, a
corporation of Sweden.

  In January 1994, the Company forfeited its right to receive certain royalties
in exchange for an additional 10% interest in the SISKA corporate joint
venture. In March 1994, the Company entered into an agreement with Organon
Teknika Corporation to sell its 60% interest in SISKA for $5,196,000 and
recorded a gain of $5,296,000 which included the reversal of $100,000
representing the Company's share of the SISKA's stockholders' deficit.


NOTE 7 -- SETTLEMENT OF LITIGATION

  In October 1995, the Company entered into settlements with two law firms for
failure to properly file a foreign patent application. The Company accepted
$4,633,000 in total damages and received $3,146,000 in net proceeds after
payment of $1,487,000 in legal expenses.


NOTE 8 -- INCOME TAXES

  As of December 31, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $20,730,000 and
$700,000, respectively, which expire beginning in 2006 and 2002, respectively.
As of December 31, 1996, the Company had federal and state tax credits for
research activities totaling approximately $1,116,000 and $370,000,
respectively, which are available to offset future income taxes.  The federal
credits expire during the years 2004 to 2010.

  The Company's ability to utilize net operating loss carryforwards and tax
credits is subject to limitations as set forth in applicable federal and state
tax laws. As specified in the Internal Revenue Code, an ownership change of
more than 50% by a combination of the Company's significant stockholders during
any three-year period would result in certain limitations on the Company's
ability to utilize its net operating loss and credit carryforwards.





                                     F-12
<PAGE>   55
Deferred tax liabilities and assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                                 ------------
                                                                              1995         1996
                                                                              ----         ----
        <S>                                                               <C>           <C>
        Deferred tax liabilities:
          Depreciation                                                    $  (447,000)  $   (431,000)
                                                                          -----------   ------------
        Deferred tax assets:
          Net operating loss carryforwards                                  5,224,000      6,581,000
          Research and development credits                                  1,304,000      1,486,000
          Purchased research and development                                   76,000         50,000
          Research and development capitalized for state tax
             purposes                                                         890,000      1,855,000
          Capital lease obligations                                           473,000        408,000
          Other                                                               230,000        327,000
                                                                          -----------   ------------
                  Total deferred tax assets                                 8,197,000     10,707,000
                                                                          -----------   ------------
        Net deferred tax assets                                             7,750,000     10,276,000
        Valuation allowance                                                (7,750,000)   (10,276,000)
                                                                          -----------   ------------
        Deferred taxes                                                    $         -   $          -
                                                                          ===========   ============
</TABLE>

  As of December 31, 1996, the Company has provided a deferred tax asset
valuation allowance for net deferred tax assets which "more likely than not"
will not be realized based on recent and expected trends in operating results.

  The Company paid state franchise taxes of $12,000, $13,000 and $31,000 during
1994, 1995 and 1996, respectively.


NOTE 9 -- STOCKHOLDERS' EQUITY

AMENDMENTS TO CERTIFICATE OF INCORPORATION

  In March 1996, the Company amended and restated its Certificate of
Incorporation to: (i) change the name of the Company to "SIBIA Neurosciences,
Inc.", (ii) split each outstanding share of Common Stock into 2.35 shares of
Common Stock, (iii) increase the authorized number of shares of Common Stock to
25,000,000, (iv) adjust the conversion rate of Convertible Preferred Stock to
2.35-for-1 and (v) provide for the automatic conversion of the Series B
Preferred Stock into Common Stock upon the closing of an initial public
offering. The 1995 stockholders' equity accounts have been restated to give
effect to the Common Stock split and increased share authorization. All
earnings per share, option and other data presented have also been restated to
give effect to the stock split.

CONVERTIBLE PREFERRED STOCK

  In July 1995, the Company amended and restated its Certificate of
Incorporation to issue up to 280,000 shares of the Company's Series C
Convertible Preferred Stock in conjunction with the Bristol-Myers Squibb stock
purchase agreement (Note 4). In August 1995, Bristol-Myers Squibb purchased
280,000 shares of Series C Convertible Preferred Stock (658,000 shares of
Common Stock on an as-if-converted basis) for an aggregate amount of $7,000,000
that was recorded net of $70,000 in issuance costs.

  In March 1994, the Company amended and restated its Certificate of
Incorporation to issue up to 173,611 shares of the Company's Series A
Convertible Preferred Stock in conjunction with the Novartis stock purchase
agreement (Note 4). In March 1994, Novartis purchased 173,611 shares of Series
A Convertible Preferred Stock (407,986 shares of Common Stock on an
as-if-converted basis) for an aggregate amount of $2,500,000.

  In March 1996, certain officers of the Company exercised options to purchase
120,200 shares of Series B Convertible Preferred Stock at $5.00 per share in
exchange for cash and $589,000 of notes receivable that bear interest at 7% per
annum.

  In May 1996, the Series A, B and C Convertible Preferred Stock were
automatically converted into Common Stock upon the Company's initial public
offering of Common Stock.





                                     F-13
<PAGE>   56
WARRANTS

  As of December 31, 1995 and 1996, warrants to purchase 258,359 shares of
Common Stock (the "warrants") were outstanding. The warrants were issued in
September 1991 as part of an acquisition. The warrants are exercisable through
October 31, 2001 upon the Company's achieving $50,000,000 from net sales of, or
royalties from, products utilizing the related acquired technology. The license
agreement to which the technology relates was cancelled in 1994 and the Company
is no longer utilizing the related technology. The warrants are not presently
exercisable and management believes that the warrants will never be
exercisable. No separate value was assigned to the warrants in 1991 as the
Company determined their value to be de minimis.


NOTE 10 -- EMPLOYEE BENEFIT PLANS

STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation.  Compensation
expense, as appropriate, has been recorded related to option grants and is
being amortized to operations over the related vesting period.  No compensation
expense has been recognized for its stock purchase plan.  Had compensation cost
for the Company's stock-based compensation awards issued during 1995 and 1996
been determined based on the fair value at the grant dates of awards consistent
with the method of Financial Accounting Standards Board Statement No. 123, the
Company's net income (loss) and pro forma net income (loss) per share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                    ------------
                                                                 1995         1996
                                                                 ----         ----
        <S>                                                   <C>          <C>
        Net income (loss):
          As reported                                         $2,926,000   $(5,564,000)
          Pro forma                                            2,698,000    (5,556,000)
        Primary net income (loss) per share:
          As reported                                               $.42        $(0.73)
          Pro forma                                                  .39         (0.73)
</TABLE>

  For purposes of determining the pro forma amounts, the fair value of each
option grant is estimated on the date of grant using the Black- Scholes option
pricing model with the following weighted average assumptions used for grants
during the years ended December 31, 1995 and 1996, respectively:  dividend
yield of 0.0% for both years, risk-free interest rates of 6.01% and 6.16%,
expected volatility of 0.0% and 34.2%, and expected lives of 4 and 5.81 years.
The weighted average fair value of options granted during 1995 and 1996 for
which the exercise price equals the market price on the grant date was $.30 and
$5.29, respectively.  The weighted average fair value of options granted during
1995 and 1996 for which the exercise price was less than the market price on
the grant date was $4.58 and $6.21, respectively.  The fair value of the
employees' purchase rights is estimated using the Black-Scholes model with the
following assumptions:  dividend yield of 0.0%, a risk-free interest rate of
5.35%, expected volatility of 67.7%, and an expected life of 6 months.  The
weighted average fair value of those purchase rights granted in 1996 was $3.44.

STOCK OPTION AND EQUITY INCENTIVE PLANS

  The Company has various stock option plans and an equity incentive plan
whereby 2,694,306 shares of the Company's Common Stock have been reserved for
issuance to its officers, directors, employees and consultants.  The plans are
administered by the Board of Directors or its designees and provide generally
that, for incentive stock options, the exercise price shall not be less than
the fair market value of the shares on the date of grant and, for non-qualified
stock options, the price shall not be less than 85% of the fair market value of
the shares on the date of grant as determined by the Board of Directors.  The
options expire not later than ten years from the date of grant and are
generally subject to vesting over four years, as





                                     F-14
<PAGE>   57
determined by the Board of Directors.  A summary of the changes in options
outstanding under the plans for the three years ended December 31, 1996 is as
follows:

<TABLE>
<CAPTION>
                                                                                             WEIGHTED
                                                                               OPTIONS        AVERAGE
                                                                             OUTSTANDING   EXERCISE PRICE
                                                                             -----------   --------------
        <S>                                                                   <C>              <C>
        Balance, December 31, 1993                                              766,095        $1.54
          Options granted:
            Price equal to the market price of stock on grant date              122,701         1.65
            Price less than the market price of stock on grant date             373,062         0.86
          Options exercised                                                     (13,865)        0.51
          Options forfeited                                                     (38,184)        3.27
                                                                              ---------
        Balance, December 31, 1994                                            1,209,809         1.30
          Options granted:
            Price equal to the market price of stock on grant date              128,310         1.45
            Price less than the market price of stock on grant date             110,919         1.18
          Options exercised                                                     (23,500)        0.80
          Options forfeited                                                     (56,559)        1.29
                                                                              ---------
        Balance, December 31, 1995                                            1,368,979         1.31
          Options granted:
            Price equal to the market price of stock on grant date              173,975         7.32
            Price less than the market price of stock on grant date             186,282         2.01
          Options exercised                                                    (570,706)        1.43
          Options forfeited                                                     (36,910)        3.06
                                                                              ---------
        Balance, December 31, 1996                                            1,121,620         2.24
                                                                              =========
        Exercisable, December 31, 1996                                          377,545
                                                                              =========
        Available for future grant, December 31, 1996                         1,572,686
                                                                              =========
</TABLE>


  Included as options outstanding as of December 31, 1996 in the above table
are options to purchase 373,062 shares of Common Stock under the Management
Change of Control Plan which, in the event of a change of control, may have
accelerated vesting of unvested options as determined by the value of the
Company on the date of such a change of control.  Also included as options
outstanding as of December 31, 1996 in the above table are options to purchase
155,455 shares of Common Stock under the 1996 Equity Incentive Plan.  Shares of
Common Stock issued under the 1996 Equity Incentive Plan may be subject to a
repurchase feature in favor of the Company in accordance with a vesting
schedule to be determined by the Board of Directors, provided however, that the
right to repurchase at the original purchase price will lapse at a minimum rate
of 20% per year over the five-year period following the date that the award was
granted.  The repurchase feature can be exercised by the Company within the
90-day period following the stockholder's termination of employment or the
relationship as a director or consultant.

  The following table summarizes information concerning currently outstanding
and exercisable stock options:

<TABLE>
<CAPTION>
                                                WEIGHTED
                                                 AVERAGE
                                                REMAINING       WEIGHTED                           WEIGHTED
            RANGE OF              NUMBER       CONTRACTUAL       AVERAGE        NUMBER             AVERAGE
        EXERCISE PRICES        OUTSTANDING        LIFE       EXERCISE PRICE   EXERCISABLE       EXERCISE PRICE
        ---------------        -----------    ------------   --------------   -----------       --------------
         <S>                  <C>                 <C>             <C>           <C>                <C>
         $0.37 - $0.85           417,947          7.09            $0.80         127,137            $0.68
          1.23 -  2.13           516,468          3.20             1.59         213,658             1.39
          6.38 -  9.88           187,205          9.18             7.28          36,750             7.40
                               ---------                                        -------
                               1,121,620                                        377,545
                               =========                                        =======
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

  In February 1996, the Company adopted the Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code in which eligible employees may use
funds from accumulated payroll deductions to purchase shares of Common Stock at
the end of each designated purchase period.  Employees may contribute up to 15%
of base salary toward such purchases, not to exceed $25,000 per calendar year.
The





                                     F-15
<PAGE>   58
purchase price is 85% of the fair market value of Common Stock determined at the
beginning or end of each purchase period, whichever is lower. The Company has
reserved 500,000 shares of Common Stock for issuance under the plan.  In 1996,
the Company issued 9,408 shares of Common Stock under the plan.

RETIREMENT SAVINGS PLAN

  The Company has a savings plan under Section 401(k) of the Internal Revenue
Code which covers all employees who meet minimum age requirements.  Employees
can contribute up to 9% of their salaries, but not in excess of the amount
deductible for income tax purposes. The Company currently matches 50% of
employee contributions up to 6% of an employee's salary, limited to the maximum
contribution allowable for income tax purposes. Employer contributions are
vested proportionately over five years of service. The plan may be amended or
discontinued at anytime by the Company. During 1994, 1995 and 1996, the Company
contributed $87,000, $104,000 and $121,000, respectively, to the plan.


NOTE 11 -- COMMITMENTS AND CONTINGENCIES

CAPITAL LEASES

  Certain scientific instrumentation, computer equipment and other equipment
acquired under available lease-line credit facilities are subject to leases
which are classified as capital leases. These capital leases mature at various
dates through 2000 and have interest rates between 4.9% and 8.1%. As of
December 31, 1996, $2,110,000 ($946,000 net of accumulated amortization) of
such leased equipment is included in property and equipment. For the years
ended December 31, 1994, 1995 and 1996, $297,000, $392,000 and $483,000 in
amortization expense, respectively, was recorded related to property acquired
under capital leases.

OPERATING LEASES

  The Company leases its principal facilities under a long-term operating lease
which expires December 31, 1997.  The Company has the option to extend the
lease for a period of five years.  Rent expense was $559,000, $563,000 and
$705,000, net of sub-lease income of $567,000, $571,000 and $586,000 for 1994,
1995 and 1996, respectively.

  Future minimum lease payments for capital and operating leases as of December
31, 1996 are as follows (operating lease payments are net of noncancellable
sub-lease income of $352,000).


<TABLE>
<CAPTION>
                                                        CAPITAL     OPERATING
                                                        LEASES        LEASES
                                                       ---------    ----------
        <S>                                            <C>          <C>
        1997                                           $  528,000   $1,023,000
        1998                                              369,000      129,000
        1999                                              145,000
        2000                                               29,000
                                                       ---------    ----------
        Total minimum lease payments                    1,071,000   $1,152,000
        Amount representing interest                       70,000   ==========
                                                       ----------
        Obligations under capital leases                1,001,000
        Less portion due within one year                  482,000
                                                       ----------
        Long-term capital lease obligations            $  519,000
                                                       ==========
</TABLE>

  During 1994, 1995 and 1996, $63,000, $71,000 and $66,000, respectively, was
paid in imputed interest on capital leases.

COMMITMENTS

  The Company has contracted for a fully automated, functional high throughput
screening system and update of related equipment with an expected cost of
approximately $750,000, of which $500,000 has been provided by Novartis (Note
4).





                                     F-16
<PAGE>   59
LEGAL PROCEEDINGS

  On July 9, 1996, the Company filed an action in the United States District
Court for the Southern District of California, for patent infringement against
Cadus Pharmaceutical Corporation ("Cadus"). Through the complaint, the Company
seeks damages in an unspecified amount and a preliminary and permanent
injunction.  On August 1, 1996, Cadus filed its answer and counterclaim to the
Company's complaint.  The counterclaim seeks compensatory and punitive damages
in an unspecified amount.  Company management believes that its complaint
against Cadus is well-founded and necessary to protect the value of its
intellectual property portfolio.  Management believes that Cadus' counterclaim
is without merit and intends to vigorously prosecute its claim of infringement
and oppose Cadus' counterclaim.  Management believes that the ultimate
resolution of the above matter will not have a material adverse impact on the
Company's financial position, results of operations or cash flows.

  In addition to the above, the Company is involved in certain legal or
administrative proceedings generally incidental to its normal business
activities.  While the outcome of any such proceeding cannot be accurately
predicted, the Company does not believe the ultimate resolution of any such
existing matters will have a material adverse effect on its financial position,
results of operations or cash flows.


NOTE 12 -- SUBSEQUENT EVENTS

CROSS-LICENSING AGREEMENT

  In January 1997, the Company entered into an agreement with Aurora
Biosciences Corporation ("Aurora").  Under the agreement, the Company will
license to Aurora non-exclusive rights to practice its patented
transcription-based assay (TBA) technology, and certain other technologies
related to automated drug screening.  In return, in addition to other
consideration, the Company will receive from Aurora non-exclusive rights to
several assay technologies, including  novel reporter molecules, that will
facilitate the Company's high throughput screening and drug discovery efforts
directed to certain receptor, ion channel and enzyme targets associated with
nervous system disorders.  Both parties will receive limited sublicensing
rights to each other's patents.

LEASE LINE FUNDING

  In February 1997, the Company received a firm commitment to fund a $1,500,000
lease line through December 15, 1997.  The fundings will have terms generally
consistent with those of the Company's existing lease commitments.

DEVELOPMENT AGREEMENT

  In February 1997, the Company entered into an agreement with Meiji Seika
Kaisha, Ltd for the development and commercialization of the Company's
proprietary nicotinic acetylcholine receptor agonist, SIB-1508Y, as a treatment
for Parkinson's disease in Japan and other Asian countries.  Under the
agreement, the Company will receive an upfront license fee of $3,000,000, and
may receive substantial development milestone payments and royalties on future
products, if any.  The Company will retain rights for the commercial
manufacture of the product.





                                     F-17